EX-13.2 3 a20201231tacex132mda.htm EX-13.2
Management’s Discussion and Analysis
Table of Contents

Business Model | M 2 | Competitive Forces | M 56
Forward-Looking Statements | M 3 | Power-Generating Portfolio Capital | M 58
Corporate Strategy | M 5 | Other Consolidated Analysis | M 59
Highlights | M 10 | Critical Accounting Policies and Estimates | M 63
Significant and Subsequent Events | M 12 | Accounting Changes | M 70
Segmented Comparable Results | M 16 | Financial Instruments | M 72
Additional IFRS Measures and Non-IFRS Measures | M 28 | Environment, Social and Governance ("ESG") | M 74
Discussion of Consolidated Financial Results | M 29 | Reliable, Low-Cost and Sustainable Energy Production | M 76
Fourth Quarter | M 33 | Natural Capital Management | M 79
Discussion of Consolidated Financial Results for the Fourth Quarter | M 35 | Climate Change Management | M 88
Human Capital Management | M 97
Selected Quarterly Information | M 38 | Social and Relationship Capital Management | M 101
Key Financial Ratios | M 39 | Manufactured Capital Management | M 107
Financial Position | M 44 | 2020 Sustainability Targets Performance | M 109
Cash Flows | M 46 | 2021+ Sustainable Targets | M 111
Financial Capital | M 47 | Governance and Risk Management | M 113
2021 Financial Outlook | M 53 | Disclosure Controls and Procedures | M 126

This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with our 2020 audited annual consolidated financial statements (the "consolidated financial statements") and our 2020 annual information form ("AIF"), each for the fiscal year ended Dec. 31, 2020. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) for Canadian publicly accountable enterprises as issued by the International Accounting Standards Board (“IASB”) and in effect at Dec. 31, 2020. All dollar amounts in the tables are in millions of Canadian dollars unless otherwise noted and except amounts per share, which are in whole dollars to the nearest two decimals. All other dollar amounts in this MD&A are in Canadian dollars, unless otherwise noted. This MD&A is dated March 2, 2021. Additional information respecting TransAlta Corporation (“TransAlta”, “we”, “our”, “us” or the “Corporation”), including our AIF, is available on SEDAR at www.sedar.com, on EDGAR at www.sec.gov and on our website at www.transalta.com. Information on or connected to our website is not incorporated by reference herein.
TRANSALTA CORPORATION M1

Management’s Discussion and Analysis
Business Model
Our Business
We are one of Canada’s largest publicly traded power generators with over 109 years of operating experience. We own, operate and manage a highly contracted and geographically diversified portfolio of assets representing 8,128 megawatts ("MW")(1) of capacity and use a broad range of fuels that include water, wind and solar, natural gas, and thermal coal. The Corporation is currently undertaking a multi-year transition to convert or retire all of our thermal coal units completely by the end of 2025. This transition will see our thermal units in Alberta discontinue all firing with thermal coal and the discontinuation of all coal mining operations by the end of Dec. 31, 2021. Our Centralia coal-fired facility in Washington State is committed to be retired under the TransAlta Energy Transition Bill. Consistent with our commitment under this bill, Centralia Unit 1 retired on Dec. 31, 2020, and the remaining unit is set to retire on Dec. 31, 2025. Our energy marketing operations maximize margins by securing and optimizing high-value products and markets for ourselves and our customers in dynamic market conditions.
Vision and Values
Our vision is to be a leader in clean electricity and we are committed to a sustainable future. Our mission is to provide safe, low-cost and reliable clean electricity. With our 109-year history of powering economies and communities, we apply our expertise, scale and diversified fuel mix to capitalize on opportunities in our core markets and grow in areas where our competitive advantages can be employed. Our values are grounded in safety, innovation, sustainability, integrity and respect, all of which enable us to work towards our common goals. These values are the principles that define our corporate culture. They reflect our skills and mindset, while providing a framework for everything we do, guiding both internal conduct and external relationships. These values are at the heart of our success.
Strategy for Value Creation
Our goals are to deliver shareholder value by delivering solid returns through a combination of dividend yield and disciplined growth in cash flow per share. We strive for a low to moderate risk profile over the long term while balancing capital allocation and maintaining financial strength to allow for financial flexibility. Our segmented cash flow growth is driven by optimizing and diversifying our existing assets and further expanding our overall portfolio and presence in Canada, the United States of America ("US") and Australia. We are focusing on these geographic areas as our expertise, scale and diversified fuel mix create a competitive advantage that we can leverage to capture expansion opportunities to create shareholder value.
Material Sustainability Impacts
Sustainability means ensuring that our financial returns consider short- and long-term economics, environmental impacts and societal and community needs. We refer to this as E 2 SG. This MD&A integrates our financial or economics ("E") and sustainability or environment, social and governance (“ESG”) reporting. Key elements of our sustainability disclosure are guided by our sustainability materiality assessment. To help inform discussion and provide context on how E 2 SG affects our business, we have referenced the provincial securities commission guidance, Global Reporting Initiative, Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures. Our content is structured following guidance on non-traditional capitals from the International Integrated Reporting Framework. In addition, we track the performance of 80 sustainability-related Key Performance Indicators ("KPIs") and have obtained a limited assurance report from Ernst & Young LLP over material KPIs.
(1) We measure capacity as net maximum capacity (see the Glossary of Key Terms for the definition of this and other key terms), which is consistent with industry standards. Capacity figures represent capacity owned and in operation unless otherwise stated, and reflect the basis of consolidation of underlying assets.
TRANSALTA CORPORATION M2

Management’s Discussion and Analysis
Forward-Looking Statements
This MD&A includes "forward-looking information" within the meaning of applicable Canadian securities laws, and "forward-looking statements" within the meaning of applicable US securities laws, including the US Private Securities Litigation Reform Act of 1995 (collectively referred to herein as "forward-looking statements"). All forward-looking statements are based on our beliefs as well as assumptions based on information available at the time the assumption was made, and on management's experience and perception of historical trends, current conditions and expected future developments, as well as other factors deemed appropriate in the circumstances. Forward-looking statements are not facts, but only predictions and generally can be identified by the use of statements that include phrases such as "may," "will," "can," "could," "would," "shall," "believe," "expect," "estimate," "anticipate," "intend," "plan," "forecast," "foresee," "potential," "enable," "continue" or other comparable terminology. These statements are not guarantees of our future performance, events or results and are subject to risks, uncertainties and other important factors that could cause our actual performance, events or results to be materially different from that set out in or implied by the forward-looking statements.
In particular, this MD&A contains forward-looking statements including, but not limited to: operating performance and transition to clean power generation, including our goal to eliminate coal as a fuel source in the Alberta thermal fleet by 2021; our Clean Energy Investment Plan and the benefits thereof; transitioning to 100 per cent clean electricity by 2025; the source of funding for the Clean Energy Investment Plan; our transformation, growth, capital allocation and debt reduction strategies; growth opportunities from 2021 and beyond, including potential for growth in renewables and on-site and cogeneration assets, including the demand therefor and greenfield development acquisitions; the amount of capital allocated to new growth or development projects and the funding thereof; our business, anticipated future financial performance and anticipated results, including our outlook and performance targets; our expectation that the sale of TransAlta's interest in the Pioneer Pipeline will close in 2021; receiving funding under the Canada Emergency Wage Subsidy program; the ability to reach a commercial solution with Energy Transfer Canada regarding the construction and operation of the Kaybob 3 cogeneration facility; the timing and the completion of growth and development projects, and their attendant costs; our estimated spend on growth and sustaining capital and productivity projects; expectations in terms of the cost of operations and maintenance, and the variability of those costs; the conversion or repowering of our coal-fired units to natural gas, and the timing and costs thereof; expectations relating to the benefits of the conversions and repowering; the terms of the current or any further proposed share buyback programs, including timing and number of shares to be repurchased pursuant to any normal course issuer bid and the acceptance thereof by the Toronto Stock Exchange ("TSX"); the mothballing of certain units; the impact of certain hedges on future earnings, results and cash flows; estimates of fuel supply and demand conditions and the costs of procuring fuel; expectations for demand for electricity, including for clean energy, in both the short term and long term, and the resulting impact on electricity prices; the impact of load growth, increased capacity and natural gas and other fuel costs on power prices; expectations in respect of generation availability, capacity and production; expectations regarding the role that different energy sources will play in meeting future energy needs; expected financing of our capital expenditures; expected governmental regulatory regimes and legislation, as well as the cost of complying with resulting regulations and laws; our marketing and trading strategy and the risks involved in these strategies; estimates of future tax rates, future tax expense and the adequacy of tax provisions; changes in accounting estimates and accounting policies; the mitigation of risks and effectiveness thereof, including as it pertains to climate change risk, environmental management, cybersecurity, commodity prices and fuel supply; anticipated growth rates and competition in our markets; our expectations and obligations and anticipated liabilities relating to the outcome of existing or potential legal and contractual claims, regulatory investigations and disputes, including the litigation with Fortescue Metals Group Ltd. relating to the South Hedland facility and the Mangrove (as defined below) proceedings relating to the Brookfield Investment, each discussed further below; our ability to achieve our E 2 SG targets; expectations regarding the renewal of collective bargaining agreements; expectations for the ability to access capital markets at reasonable terms; the estimated impact of changes in interest rates and the value of the Canadian dollar relative to the US dollar, the Australian dollar and other currencies in locations where we do business; the monitoring of our exposure to liquidity risk; expectations in respect to the global economic environment and growing scrutiny by investors relating to sustainability performance; and our credit practices.
The forward-looking statements contained in this MD&A are based on many assumptions including, but not limited to, the following: the impacts arising from COVID-19 not becoming significantly more onerous on the Corporation, which includes the Corporation being permitted to continue to operate as an essential service; no significant changes to applicable laws and regulations, including any tax and regulatory changes in the markets in which we operate; no material adverse impacts to investment and credit markets; Alberta spot power prices being in the range of $58 to $68 per megawatt hour ("MWh") in 2021; Mid-C spot power prices being in the range of US$25 to US$35 per MWh in 2021; sustaining capital in 2021 being between $175 million and $210 million; productivity capital of $3 million to $7 million; applicable discount rates; our proportionate ownership of TransAlta Renewables Inc. ("TransAlta Renewables") not changing materially; no decline in the dividends to be received from TransAlta Renewables; the expected life extension of the Alberta thermal fleet and anticipated financial results generated on conversion or repowering; assumptions
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Management’s Discussion and Analysis
regarding the ability of the converted units to successfully compete in the Alberta energy market; and assumptions regarding our current strategy and priorities, including as it pertains to our current priorities relating to the conversion to gas, growing TransAlta Renewables and realizing the full economic benefit from our capacity, energy and ancillary services.
Forward-looking statements are subject to a number of significant risks, uncertainties and assumptions that could cause actual plans, performance, results or outcomes to differ materially from current expectations. Factors that may adversely impact what is expressed or implied by forward-looking statements contained in this MD&A include, but are not limited to, risks relating to the impact of COVID-19, which cannot currently be predicted, and which present risks including, but not limited to: more restrictive directives of government and public health authorities; reduced labour availability and ability to continue to staff our operations and facilities; disruptions to our supply chains, including our ability to secure necessary equipment or to obtain regulatory approvals on the expected timelines or at all; COVID-19-related force majeure claims; restricted access to capital and increased borrowing costs; a further decrease in short-term and/or long-term electricity demand and lower merchant pricing in Alberta and Mid-C; reductions in production; increased costs resulting from our efforts to mitigate the impact of COVID-19; deterioration of worldwide credit and financial markets; a higher rate of losses on our accounts receivable due to credit defaults; impairments and/or writedowns of assets; and adverse impacts on our information technology systems and our internal control systems, including increased cybersecurity threats. The forward-looking statements are also subject to other risk factors that include, but are not limited to: fluctuations in market prices; changes in demand for electricity and capacity and our ability to contract our generation for prices that will provide expected returns and replace contracts as they expire; changes to the legislative, regulatory and political environments in the jurisdictions in which we operate; environmental requirements and changes in, or liabilities under, these requirements; changes in general economic or market conditions including interest rates; operational risks involving our facilities, including unplanned outages at such facilities; disruptions in the transmission and distribution of electricity; the effects of weather and other climate-change related risks; unexpected increases in cost structure; disruptions in the source of fuels, including natural gas required for the conversions and repowering, as well as the extent of water, solar or wind resources required to operate our facilities; failure to meet financial expectations; natural and man-made disasters, including those resulting in dam or dyke failures; the threat of domestic terrorism and cyberattacks; pandemics or epidemics and any associated impact on supply chain; equipment failure and our ability to carry out or have completed the repairs in a cost-effective manner, timely manner or at all; commodity risk management and energy trading risks; industry risk and competition; the need to engage or rely on certain stakeholder groups and third parties; fluctuations in the value of foreign currencies and foreign political risks; the need for and availability of additional financing; structural subordination of securities; counterparty credit risk; changes to our relationship with, or ownership of, TransAlta Renewables; risks associated with development projects and acquisitions, including capital costs, permitting, labour and engineering risks, and delays in the construction or commissioning of projects or delays in the closing of acquisitions; changes in expectations in the payment of future dividends, including from TransAlta Renewables; inadequacy or unavailability of insurance coverage; downgrades in credit ratings; our provision for income taxes; legal, regulatory and contractual disputes and proceedings involving the Corporation, including as it pertains to establishing commercial operations at the South Hedland facility and in relation to the Brookfield Investment; reliance on key personnel; and labour relations matters. The foregoing risk factors, among others, are described in further detail in the Governance and Risk Management section of this MD&A and the Risk Factors section in our AIF for the year ended Dec. 31, 2020.
Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on them, which reflect the Corporation's expectations only as of the date hereof. The forward-looking statements included in this document are made only as of the date hereof and we do not undertake to publicly update these forward-looking statements to reflect new information, future events or otherwise, except as required by applicable laws. The purpose of the financial outlooks contained herein is to give the reader information about management's current expectations and plans and readers are cautioned that such information may not be appropriate for other purposes. In light of these risks, uncertainties and assumptions, the forward-looking statements might occur to a different extent or at a different time than we have described, or might not occur at all. We cannot assure that projected results or events will be achieved.
TRANSALTA CORPORATION M4

Management’s Discussion and Analysis
Corporate Strategy
Our strategic focus is to invest in a disciplined manner in a range of clean and renewable power generation such as hydro, wind, solar, energy storage and thermal (natural gas-fired and cogeneration) and develop customer-centric green power solutions that produce electricity for the needs of our industrial customers and communities in order to deliver returns to our shareholders.
Clean Energy Investment Plan
TransAlta's Clean Energy Investment Plan, announced in 2019, includes converting our existing Alberta coal assets to natural gas and advancing our leadership position in on-site generation and renewable electricity. The Clean Energy Investment Plan identified opportunities of $1.9 billion to $2.1 billion that TransAlta is pursuing. A significant number of these opportunities have been completed, with the projects achieving commissioned status in 2019 and 2020.
The implementation and execution of TransAlta's Clean Energy Investment Plan, including the acceleration of certain features of that plan, is being facilitated by the $750 million strategic investment (the "Brookfield Investment") by Brookfield Renewable Partners or its affiliates (collectively, "Brookfield") that we announced in March 2019. The first $350 million tranche of Brookfield's Investment closed in May 2019 and facilitated the acceleration of our conversion to gas plan discussed below. The second $400 million tranche of Brookfield's Investment closed on Oct. 30, 2020, and will help further the advancement and implementation of the remainder of our Clean Energy Investment Plan. The Brookfield Investment will fund other growth initiatives, while helping the Corporation maintain a strong balance sheet and financial flexibility to carry out the other pillars of our strategy discussed below. Please refer to the Significant and Subsequent Events section of this MD&A for further details.
Please refer to the 2021+ Sustainable Development Targets section of this MD&A for further details on sustainability targets and near-term objectives that further support our Clean Energy Investment Plan.
Our strategic priorities were advanced in 2020 and what follows is an update of how we executed in 2020, as well as our intentions for 2021 and beyond:
1.Successfully convert to natural gas as the primary fuel source in the Alberta thermal fleet
We are transitioning our Alberta thermal fleet to natural gas as part of our Clean Energy Investment Plan. We plan to invest between $900 million to $1.0 billion to convert or repower our Alberta thermal fleet to natural gas. This will repurpose and reposition our fleet to a cleaner, gas-fired fleet while delivering attractive returns through leveraging the Corporation's existing infrastructure.
The highlights of these gas conversion investments include:
▪Positioning TransAlta’s fleet as a low-cost clean energy generator in the Alberta energy-only market;
▪Generating attractive returns by leveraging the Corporation’s existing infrastructure;
▪Significantly extending the life and cash flows of our Alberta thermal assets; and
▪Significantly reducing air emissions and costs.
The following key achievements over the past year helped us advance this part of our strategy:
▪Conversion to gas – TransAlta’s Clean Energy Investment Plan includes converting three of our existing Alberta thermal units to gas during 2021 by replacing existing coal burners with natural gas burners. The cost to convert each of TransAlta's wholly owned units is expected to be approximately $35 million per unit. On Feb. 1, 2021, we announced the completion of the conversion to gas of Sundance Unit 6. The Corporation continues to advance conversion of its Keephills Unit 2 and Keephills Unit 3 for completion later in 2021 and has issued Full Notice to Proceed (“FNTP”) for both units. In addition, on April. 4, 2020, the dual-fuel conversion of Sheerness Unit 2 was completed. The Sheerness Unit 1 conversion to gas is in progress with expected completion in the first quarter of 2021. The Sheerness facility will receive it's last coal shipment in the first quarter of 2021, with coal stock being actively depleted until the end of 2021. The elimination of coal as a fuel source will reduce future fuel costs and greenhouse gas ("GHG") costs at Sheerness.
▪Gas Repowering – The Clean Energy Investment Plan also includes the repowering of the steam turbines at Sundance Unit 5 and, potentially, Keephills Unit 1, by installing one or more combustion turbines and heat recovery steam generators, thereby creating highly efficient combined-cycle units. The repowered units are expected to be a 35 per cent to 45 per cent lower capital investment when compared to a new combined-cycle facility, while achieving a similar heat rate. During the first quarter of 2020, we received regulatory approval from the Alberta Utilities Commission ("AUC") and Alberta Environment and Parks for the repowering of
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Management’s Discussion and Analysis
Sundance Unit 5 and Keephills Unit 1 into combined-cycle units. During the fourth quarter of 2020, an equipment supply agreement was executed as part of the strategy to repower Sundance Unit 5 into a highly efficient combined-cycle unit. The commercial operation date is anticipated in the fourth quarter of 2023. The Sundance Unit 5 repowered combined-cycle unit will have a capacity of approximately 730 MW and is expected to cost approximately $800 million to $825 million, well below a greenfield combined-cycle project. As part of this transaction, we also acquired a long-term power purchase agreement ("PPA") for capacity plus energy, including the pass-through of GHG costs, starting in late 2023 with Shell Energy North America (Canada). The Corporation will continue to evaluate the prospect for the repowering of Keephills Unit 1 in 2021 and 2022 as a supply addition to the Alberta market in the 2026 to 2030 time frame.
▪Cessation of Coal-Fired Operations by 2022 – TransAlta has determined to cease coal-fired operations in Canada by Jan. 1, 2022. During the third quarter of 2020, we approved the accelerated shutdown of the Highvale mine by the end of 2021, and the useful life of the related assets was adjusted to align with the Corporation's conversion to gas plans. We will continue to actively deplete our coal stock and will wind down our mining activity by the end of 2021. As a result, we announced that Keephills Unit 1 and Sundance Unit 4 will discontinue firing with coal and will be subject to further strategic assessment as to their feasibility to operate on gas effective Jan. 1, 2022. The maximum capability of these units will be reduced to 70 MW and 113 MW, respectively, when transitioned to operate on gas.
▪Pioneer Pipeline and Gas Supply – On Oct 1, 2020, TransAlta announced that it had entered into a definitive Purchase and Sale Agreement for the sale of its 50 per cent interest in the Pioneer Pipeline to ATCO Gas and Pipelines Ltd. (“ATCO”) (the "Transaction"). The purchase price of $255 million represents both TransAlta's and Tidewater Midstream & Infrastructure Ltd.'s ("TMI") interests. This agreement replaces the previous Purchase and Sale Agreement to sell the Pioneer Pipeline to NOVA Gas Transmission Ltd. ("NGTL") from the second quarter of 2020. ATCO acquired the right to purchase the Pioneer Pipeline through an option agreement with NGTL. Following closing of the Transaction, the Pioneer Pipeline will be integrated into NGTL's and ATCO's Alberta integrated natural gas transmission systems to provide reliable natural gas supply to TransAlta's Sundance and Keephills power-generating stations. As part of the agreement, TransAlta has entered into incremental, long-term firm natural gas delivery transportation agreements with NGTL for 351 TJ per day, bringing the total firm natural gas transportation contracts up to 400 TJ per day by 2023. TransAlta’s current commitments, including the 139 TJ per day supply arrangement with TMI, will remain in place until the closing of the Transaction. The Transaction is subject to customary regulatory approvals and is anticipated to close during the second quarter of 2021.
▪Retirement of Sundance 3 – On July 22, 2020, the Corporation announced that it gave notice to the Alberta Electric System Operator ("AESO") to retire the mothballed coal-fired Sundance Unit 3 effective July 31, 2020. The retirement decision was largely driven by our assessment of future market conditions, the age and condition of the unit, and our ability to supply energy and capacity from our generation portfolio in Alberta. This decision advances our transition to 100 per cent clean electricity by 2025.
2. Deliver growth in our renewables fleet
We expanded our renewables platform in the US in 2020 and continue to identify additional opportunities with customers on electricity offerings with a higher component of power coming from renewable sources. Our focus is to deliver solid returns using exceptional project development, construction and integration of skills and capabilities. In 2019, the Big Level and Antrim wind development projects were commissioned, allowing us to invest $340 million in projects with solid returns. The Skookumchuck wind project and WindCharger battery storage project were commissioned in 2020, representing investments of $93 million, which were within expected cost estimates. For 2021, we are constructing the Windrise wind project in Alberta, which is expected to be commissioned by year-end. Our contract expansion at the Southern Cross facility in Australia provides an additional opportunity to invest in renewables.
The following provides more detail on our 2020 achievements:
Windrise Wind Project
On Dec. 17, 2018, TransAlta's 207 MW Windrise wind project ("Windrise") was identified by the AESO as one of the three selected projects in the third round of the Renewable Electricity Program. TransAlta and the AESO subsequently executed a Renewable Electricity Support Agreement with a 20-year term. Windrise is situated on 11,000 acres of land located in the county of Willow Creek, Alberta, and is expected to cost approximately $270 million to $285 million. Windrise has secured approval for the wind facility and transmission line required to connect the facility to the Alberta grid from the Alberta Utilities Commission ("AUC”). Construction activities on Windrise continue to advance with all appropriate procedures in place to protect the construction team during the COVID-19 pandemic. However, as a result
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Management’s Discussion and Analysis
of COVID-19 and related delays in construction, the commercial operation date is expected to occur during the second half of 2021. As of Dec. 31, 2020, Windrise was 78 per cent complete.
Skookumchuck Wind Project
On Nov. 25, 2020, TransAlta completed the acquisition of the 49 per cent equity investment in the Skookumchuck wind project ("Skookumchuck") with Southern Power Company, a subsidiary of Southern Company. Skookumchuck is a 136.8 MW wind project located in Lewis and Thurston counties near Centralia in Washington state consisting of 38 Vestas V136 wind turbines. The project began commercial operation on Nov. 7, 2020, and has a 20-year PPA with Puget Sound Energy. TransAlta's total net capital investment was $86 million (US$66 million) cash, with an additional $77 million (US$59 million) being funded with tax equity financing.
BHP Nickel West Contract Extension
On Oct. 22, 2020, Southern Cross Energy ("SCE"), a subsidiary of the Corporation, replaced and extended its current PPA with BHP Billiton Nickel West Pty Ltd. ("BHP"). SCE is composed of four generation facilities with a combined capacity of 245 MW in the Goldfields region of Western Australia.
The new agreement was effective Dec. 1, 2020, and replaces the previous contract that was scheduled to expire Dec. 31, 2023. The amendment to the PPA extends the term to Dec. 31, 2038, and provides SCE with the exclusive right to supply thermal and electrical energy from the Southern Cross facilities for BHP's mining operations located in the Goldfields region of Western Australia. The extension will provide SCE a return on new capital investments, which will be required to support BHP's future power requirements and recently announced emission reduction targets. The amendments within the PPA also provide BHP participation rights in integrating renewable electricity generation, including solar and wind, with energy storage technologies, subject to the satisfaction of certain conditions. Evaluation of renewable energy supply and carbon emissions reduction initiatives under the extended PPA with SCE are underway, including an 18.5 MW solar photovoltaic facility supported by a battery energy storage system and a waste heat steam turbine system.
WindCharger Project
On Aug. 1, 2020, the WindCharger battery storage project ("WindCharger") was sold to TransAlta Renewables. WindCharger has been operational since Oct. 15, 2020, and is the first utility-scale battery energy storage project in Alberta. The WindCharger project has a nameplate capacity of 10 MW with a total storage capacity of 20 MWh. It is located in southern Alberta in the Municipal District of Pincher Creek next to TransAlta’s existing Summerview wind facility substation. WindCharger stores energy produced by the nearby Summerview II wind facility and discharges it into the Alberta electricity grid at times of peak demand. TransAlta is expected to receive co-funding of almost 50 per cent of the $14 million construction cost from Emissions Reduction Alberta. WindCharger is participating in both the Alberta wholesale energy and ancillary services market of the AESO.
US Wind Projects
In 2019, we completed the construction of two wind projects (collectively, the "US Wind Projects") in the Northeastern US. The Big Level wind project ("Big Level") acquired on March 1, 2018, consists of a 90 MW project located in Pennsylvania that has a 15-year PPA with Microsoft Corporation. The Antrim wind project ("Antrim") acquired on March 28, 2019, consists of a 29 MW project located in New Hampshire with two 20-year PPAs with Partners Healthcare and New Hampshire Electric Co-op. Big Level and Antrim began commercial operations on Dec. 19, 2019, and Dec. 24, 2019, respectively. The US Wind Projects have added an additional 119 MW of generating capacity to our Wind and Solar portfolio.
3. Expand presence in the US renewables market
A major focus of our business development efforts is on the renewables segment of the US market. Demand for new renewables in the US is expected to continue its strong growth in the near term and President Biden is expected to initiate policies designed to support further renewables growth. We have started prospecting for new renewable development sites in a number of attractive US markets. These opportunities are expected to grow TransAlta Renewables, utilize its excess debt capacity and deliver stable dividends back to TransAlta.
In addition to the US Wind Projects, the Skookumchuck wind project and the prospecting activities discussed above, TransAlta acquired a portfolio of up to 1,250 gigawatts ("GW") of wind development projects in the US in 2019. A number of projects acquired within this portfolio are currently in the early stages of development by TransAlta.
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Management’s Discussion and Analysis
4. Advance and expand our on-site generation and cogeneration business
We are focused on growing our on-site and cogeneration asset base, a business segment we have deep experience in, having provided on-site cogeneration services to customers since the early 1990s. Our current pipeline under evaluation is approximately 600 MW and our technical design, operations experience and safety culture make us a strong partner in this segment. We see this segment growing as industrial and large-scale customers are looking to find solutions to help lower the costs of power production, replace aging or inefficient equipment, reduce network costs and meet their ESG objectives.
On Nov. 30, 2020, TransAlta acquired a 30 per cent equity interest in EMG International, LLC ("EMG") to diversify our sustainability offerings to customers while directly supporting our clean energy transition and sustainability goals. Included in the purchase price of US$12 million is an estimated component contingent on EMG realizing certain earnings metrics in 2020 and 2021, following the acquisition. The final contingent amount will be calculated based on actual earnings metrics achieved. EMG is an established company with over 25 years of experience in process wastewater treatment and specializes in the design and construction of high-rate anaerobic digester systems. EMG’s wastewater treatment process converts organic waste into a valuable source of renewable energy. Their technology produces a biogas stream that can be used as fuel to generate electricity, displacing energy consumed from higher-emitting resources. The investment provides a unique opportunity for TransAlta to leverage its vast expertise in on-site generation to support further advancements by EMG in the waste-to-energy space. This investment will advance the Corporation's presence in the US sustainability and on-site generation markets.
On May 19, 2020, the Corporation closed the acquisition of a contracted natural-gas-fired cogeneration asset from two private companies for a purchase price of US$27 million. The Ada facility is a 29 MW cogeneration facility ("Ada") in Michigan that is contracted under a PPA and a steam sale agreement for approximately six years with Consumers Energy and Amway.
In 2019, TransAlta and Energy Transfer Canada ("ET Canada" formerly known as SemCAMS Midstream ULC) entered into agreements to develop, construct and operate a 40 MW cogeneration facility at the Kaybob South No. 3 sour gas processing plant (“K3”). The facility was expected to receive its final regulatory approvals in the second half of the year and begin construction in December 2020. On Sept. 25, 2020, the AUC released a decision in which it approved the construction and operation of the facility, but denied the application for the Industrial System Designation. We are in ongoing commercial and technical discussions with ET Canada relative to the project at K3, or potentially developing a new project at another site owned and/or operated by ET Canada
5. Maintain a strong financial position
We intend to remain disciplined in our capital investment strategy and continue to build on our already strong financial position.
We currently have access to $2.1 billion in liquidity, including $703 million in cash. During 2020, we closed an AU$800 million offering ("TEC Offering"), through TEC Hedland Pty Ltd. ("TEC"), a subsidiary of the Corporation, and received $400 million of the second and final tranche of the $750 million strategic financing from Brookfield. We repaid a $400 million medium-term note due on Nov. 25, 2020. Further to the final closings of the recently announced dropdown transaction to TransAlta Renewables, the Corporation has reached its target balance of $1.2 billion of senior corporate debt. In 2019, we received the first tranche of the Brookfield Investment for $350 million, increased our credit facilities by $200 million to a total of $2.2 billion while extending the maturity of the term by one year, and successfully obtained US$126 million of tax equity financing associated with the US Wind Projects.
The Clean Energy Investment Plan is being funded from the cash raised through the Brookfield Investment, cash generated from operations and capital raised through TransAlta Renewables. For further details on the Brookfield Investment and TEC Offering, please refer to the Significant and Subsequent Events section of this MD&A.
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Management’s Discussion and Analysis
Management of the Alberta Portfolio
On Dec. 31, 2020, the power purchase arrangement for many of our Alberta hydro facilities and Keephills 1 and 2 units expired and, effective Jan. 1, 2021, these facilities began operating on a merchant basis in the Alberta market. The facilities are dispatched to benefit from the price volatility in the Alberta energy-only electricity market and to provide ancillary services. As such, they are to be part of our Alberta electricity portfolio optimization activities. The variability in production by facility is driven by the diversity in our fuel types, which enables portfolio management. The Alberta portfolio of production includes hydro, wind, energy storage and thermal units. A portion of the baseload of the portfolio is hedged to provide cash flow certainty.
Growth and Conversion to Gas Expenditures
Our growth projects are focused on sustaining our current operations and supporting our growth strategy in our Clean Energy Investment Plan. A summary of the status of the significant growth and major projects in the Clean Energy Investment Plan is outlined below:

| Total project |  | Estimated spend in 2021 | Target completion date(2) |  |
| Estimated spend | Spent to date(1) |  |  | Details
Project |  |  |  |  |  |  |  |  |
Big Level wind development project(3) | 225 |  | - | 240 | 234 |  |  | 1 |  | Commissioned in 2019 |  | 90 MW wind project with a 15-year PPA
Antrim wind development project(4) | 100 |  | - | 110 | 106 |  |  | 1 |  | Commissioned in 2019 |  | 29 MW wind project with two 20-year PPAs
Pioneer gas pipeline partnership | 95 |  | - | 100 | 105 |  |  | — |  | Commissioned in 2019 |  | 50 per cent ownership in the 120 km natural gas pipeline to supply gas to Sundance and Keephills
Skookumchuck wind development project(5,6) | 160 |  | - | 170 | 86 |  |  | — |  | Commissioned in 2020 |  | Option to purchase a 49 per cent ownership in the 136.8 MW wind project with a 20-year PPA
Windrise wind development project(6) | 270 |  | - | 285 | 205 |  |  | 68 |  | H2 2021 |  | 207 MW wind project with a 20-year Renewable Electricity Support Agreement with AESO
WindCharger battery(7) | 7 |  | - | 8 | 7 |  |  | — |  | Commissioned in 2020 |  | 10 MW/ 20 MWh utility-scale Battery Storage Project
Boiler conversions | 120 |  | - | 200 | 75 |  |  | 40 |  | 2020 to 2021 |  | Conversion to gas at Alberta Thermal
Repowering | 800 |  | - | 825 | 113 |  |  | 298 |  | Q4 2023 |  | Repower Sundance Unit 5 to a combined cycle design
Kaybob cogeneration project | 105 |  | - | 115 | 48 |  |  | 40 |  | TBD(8) |  | 40 MW cogeneration project with ET Canada
Total | 1,882 |  | - | 2,053 |  | 979 |  |  | 448 |  |  |  |

(1) Represents cumulative amounts spent as of Dec. 31, 2020.
(2) H1 is defined as the first half of the year and H2 is defined as the second half of the year.
(3) The numbers reflected above are in Canadian dollars, but the actual cash spend on this project is in US dollars and therefore these amounts will fluctuate with changes in foreign exchange rates. The estimated total spend is approximately US$173 million to US$185 million, spent to date is US$179 million and estimated remaining spend in 2021 is US$1 million. TransAlta Renewables funded a portion of the construction costs using its existing liquidity and the remaining was funded with tax equity financing.
(4) The numbers reflected above are in Canadian dollars, but the actual cash spend on this project is in US dollars and therefore these amounts will fluctuate with changes in foreign exchange rates. The estimated total spend is approximately US$77 million to US$85 million, spent to date is US$80 million and estimated remaining spend in 2021 is US$1 million. TransAlta Renewables funded a portion of the construction costs using its existing liquidity and the remaining was funded with tax equity financing.
(5) The numbers reflected above are in Canadian dollars, but the actual cash spent on this project is in US dollars. The total cash spent was US$66 million, with the remainder funded through tax equity financing of $77 million (US$59 million).
(6) The economic interest in Skookumchuck will be sold to TransAlta Renewables in the first half of 2021. The Windrise wind development project was sold to TransAlta Renewables on Feb. 26, 2021.
(7) The WindCharger project was acquired by TransAlta Renewables in 2020. Amounts shown are net of expected government reimbursements.
(8) Timing of the Kaybob cogeneration project is to be determined subject to ongoing commercial and technical discussions with ET Canada, as described above.
TRANSALTA CORPORATION M9

Management’s Discussion and Analysis
Highlights
Consolidated Financial Highlights

Year ended Dec. 31 | 2020 | 2019 | 2018
Adjusted availability (%) | 90.3 |  | 90 | 91.3 |
Production (GWh) | 24,980 |  | 29,071 |  | 28,409 |
Revenues | 2,101 |  | 2,347 |  | 2,249 |
Fuel, carbon compliance and purchased power | 968 |  | 1,086 |  | 1,100 |
Operations, maintenance and administration | 472 |  | 475 |  | 515 |
Net earnings (loss) attributable to common shareholders(1) | (336) |  | 52 |  | (248) |
Cash flow from operating activities | 702 |  | 849 |  | 820 |
Comparable EBITDA(1,2) | 927 |  | 984 |  | 1,161 |
Funds from operations(1,2) | 685 |  | 757 |  | 927 |
Free cash flow(1,2) | 358 |  | 435 |  | 524 |
Net earnings (loss) per share attributable to common shareholders, basic and diluted | (1.22) |  | 0.18 |  | (0.86) |
Funds from operations per share(1,2) | 2.49 |  | 2.67 |  | 3.23 |
Free cash flow per share(1,2) | 1.30 |  | 1.54 |  | 1.83 |
Dividends declared per common share | 0.22 |  | 0.12 |  | 0.20 |
Dividends declared per preferred share(3) | 1.27 |  | 0.78 |  | 1.29 |
As at Dec. 31 | 2020 | 2019 | 2018
Total assets | 9,747 |  | 9,508 |  | 9,428 |
Total consolidated net debt(2,4) | 3,175 |  | 3,110 |  | 3,141 |
Total long-term liabilities(5) | 5,376 |  | 4,329 |  | 4,414 |

(1) Includes $157 million received from the Balancing Pool for the early termination of Sundance B and C PPAs in the first quarter of 2018 and $56 million received on settlement of the dispute with the Balancing Pool in the third quarter of 2019.
(2) These items are not defined and have no standardized meaning under IFRS. Presenting these items from period to period provides management and investors with the ability to evaluate earnings trends more readily in comparison with prior periods’ results. Please refer to the Discussion of Consolidated Financial Results section of this MD&A for further discussion of these items, including, where applicable, reconciliations to measures calculated in accordance with IFRS. See also the Additional IFRS Measures and Non-IFRS Measures section of this MD&A.
(3) Weighted average of the Series A, B, C, E and G preferred share dividends declared. Dividends declared vary year over year due to timing of dividend declarations.
(4) Total consolidated net debt includes long-term debt, including current portion, amounts due under credit facilities, exchangeable securities, US tax equity financing and lease liabilities, net of available cash and cash equivalents, the principal portion of restricted cash on our subsidiary TransAlta OCP LP ("TransAlta OCP") and the fair value of economic hedging instruments on debt. See the table in the Financial Capital section of this MD&A for more details on the composition of total consolidated net debt.
(5) Certain comparative figures have been reclassified to conform to the current period’s presentation. These reclassifications did not impact previously reported net earnings.
We showed strong performance and results within the current year, advancing our Clean Energy Investment Plan by accelerating our conversion to gas strategy, successfully managing our business during a global pandemic and keeping our people healthy and safe. We achieved these objectives despite the unfavourable impacts of COVID-19, including reduced electricity demand load, delays in construction and additional costs associated with new safety protocols and protective equipment required to effectively and safely operate our business. In spite of these challenges, we delivered strong operational performance and financial results in line with our guidance for comparable EBITDA and free cash flow ("FCF").
FCF, one of the Corporation's key financial metrics, totalled $358 million in 2020, down $77 million compared to last year. FCF, excluding the PPA Termination Payment received in 2019, decreased by $21 million compared to 2019. The decline was driven primarily by lower segmented cash flows at the Alberta Thermal segment and higher sustaining capital expenditures, partially offset by strong cash flows for Centralia and lower distributions paid to subsidiaries' non-controlling interests. Segmented cash flows for 2020 are consistent with 2019. Lower power demand and production in our Alberta Thermal segment and the impact of the total return swap recognized in 2019 in the Corporate segment was offset by higher performance in our Centralia, Wind and Solar, North American Gas and Energy Marketing segments. Significant changes in segmented cash flows are highlighted in the Segmented Comparable Results section of this MD&A.
TRANSALTA CORPORATION M10

Management’s Discussion and Analysis
Adjusted availability for 2020 was 90.3 per cent compared to 90.0 per cent in 2019. Lower planned and unplanned outages and derates within the generation segments were offset by the planned outage at Alberta Thermal for the Sundance Unit 6 turnaround and conversion to gas outage.
Production for 2020 was 24,980 gigawatt hours ("GWh") compared to 29,071 GWh in 2019. Overall, the production decrease was primarily due to planned outages, curtailments at Alberta Thermal and increased dispatch optimization at Alberta Thermal and Centralia due to lower merchant pricing, which was partially offset by higher production from higher wind and hydro resources and a full year of production at the Big Level and Antrim facilities. There was reduced electricity demand in North America due to COVID-19, which also had a significant impact on production.
Revenues for 2020 decreased by $246 million compared to 2019, as we saw lower demand and power prices across North America. This was partially offset by a full year of production from the Big Level and Antrim facilities in the Wind and Solar segment and the acquisition of the Ada facility during the year in the North American Gas segment.
Fuel, carbon compliance and purchased power costs in 2020 decreased by $118 million compared to 2019. Fuel, carbon compliance and purchased power costs were impacted by lower production in the year, offset by higher coal costs at Alberta Thermal and by the additional costs of production of the Ada facility. Coal costs include a writedown of coal inventory and increased depreciation resulting from the decision to accelerate the closure of the Highvale mine. Our ability to co-fire with natural gas assisted in reducing fuel costs as co-firing allows us to produce fewer GHG emissions than 100 per cent coal combustion and lowers our GHG compliance costs.
Operations, maintenance and administration ("OM&A") expenses for 2020 decreased by $3 million compared to 2019. OM&A decreased due to tighter cost controls, reduced staffing in line with conversion to gas transition plans, lower production at Centralia and Alberta Thermal, lower labour costs across multiple segments and lower legal fees. This was partially offset by the impact of the total return swap recognized in 2019 of $15 million, additional operating costs from new facilities including Big Level, Antrim and Ada, and the renegotiation of the Fort Saskatchewan maintenance agreement. Excluding the impact of the total return swap and new facilities, OM&A decreased by $28 million.
Comparable EBITDA decreased by $57 million compared to 2019. After adjusting for the PPA Termination Payments for 2019 and the AESO line loss adjustment of $8 million, comparable EBITDA increased by $7 million compared to 2019. Comparable EBITDA increased as a result of the new facilities at the Wind and Solar segment, higher comparable EBITDA in Centralia and continued strong performance in the Energy Marketing segment. This was partially offset by lower production at Alberta Thermal as a result of lower merchant demand. Significant changes in segmented comparable EBITDA are highlighted in the Segmented Comparable Results within this MD&A.
Net loss attributable to common shareholders for 2020 was $336 million compared to earnings of $52 million in 2019.
Net loss attributable to common shareholders has been impacted by higher interest expense associated with the TEC Offering and the second tranche of the Brookfield Investment, higher depreciation from acceleration of the conversion to gas, gains recognized on the Keephills 3 and Genesee 3 asset swap that occurred in 2019, the $56 million settlement on the Sundance B and C PPAs in 2019 and further impacts related to our decisions to accelerate our transition to gas, including:
▪Higher depreciation as we accelerate the closure of the Highvale mine;
▪Writedown of $37 million of coal inventory;
▪Onerous provision of $29 million on the coal supply contract for Sheerness; and
▪Impairment of $70 million associated with the retirement of Sundance 3.
TRANSALTA CORPORATION M11

Management’s Discussion and Analysis
Ability to Deliver Financial Results
The metrics we use to track our performance are comparable EBITDA and FCF. The following table compares target to actual amounts for each of the three past fiscal years:

Year ended Dec. 31 |  | 2020 | 2019 | 2018
Comparable EBITDA | Target(1) | 925-1,000 | 875-975 | 1,000-1,050
Actual | 927 |  | 984 |  | 1,161 |
Adjusted actual(2) | 927 |  | 928 |  | 1,004 |
FCF | Target(1) | 325-375 | 350-380 | 300-350
| Actual | 358 |  | 435 |  | 524 |
| Adjusted actual(2) | 358 |  | 379 |  | 367 |

(1) Represents our revised outlook. In the fourth quarter of 2019, we revised our FCF target from a range of $270 million to $330 million to a range of $350 million to $380 million. As a result of strong performance in the first quarter of 2018, we revised the following 2018 targets: comparable EBITDA from the previously announced target range of $950 million to $1,050 million to $1,000 to $1,050 million, FCF target range from $275 million to $350 million to the target range of $300 million to $350 million.
(2) 2019 and 2018 were adjusted for the PPA Termination Payments as these were not included in the targets.
Significant and Subsequent Events
TransAlta Renewables Acquisitions
On Dec. 23, 2020, the Corporation announced that it had entered into definitive agreements for the acquisition by TransAlta Renewables of its 100 per cent direct interest in the 207 MW Windrise wind project located in the Municipal District of Willow Creek, Alberta; a 49 per cent economic interest in the 137 MW Skookumchuck wind facility located across Thurston and Lewis counties in Washington State; and a 100 per cent economic interest in the 29 MW Ada cogeneration facility located in Ada, Michigan. TransAlta Renewables' acquisition of the Windrise wind project closed on Feb. 26, 2021, and the acquisition of the economic interests in the Ada facility and the Skookumchuck wind facility are expected to close in April 2021. The total acquisition value for the portfolio of assets is expected to be $439 million, which includes the remaining construction costs for the Windrise wind project. TransAlta Renewables will fund the acquisition and remaining construction costs with the proceeds from the TEC Hedland financing as further described below.
TEC Hedland Pty Ltd. Secures AU$800 Million Financing
On Oct. 22, 2020, TEC, a subsidiary of the Corporation, closed an AU$800 million senior secured note offering, by way of a private placement, which is secured by, among other things, a first ranking charge over all assets of TEC. The TEC Offering bears interest at 4.07 per cent per annum, payable quarterly and maturing on June 30, 2042, with principal payments starting on March 31, 2022. The TEC Offering has a rating of BBB by Kroll Bond Rating Agency.
TransAlta Renewables has received $480 million (AU$515 million) of the proceeds from the TEC Offering through the redemption of certain intercompany structures. An additional AU$200 million has been loaned to TransAlta Renewables by TransAlta Energy (Australia) Pty Ltd., which is a subsidiary of TransAlta. The loan bears interest at 4.32 per cent and will be repaid by Oct. 23, 2022, or on demand. The remaining proceeds from the TEC Offering were set aside for required reserves and transaction costs.
TransAlta Renewables used a portion of the proceeds from the redemption and the intercompany loan to repay existing indebtedness on its credit facility and to acquire the asset and economic interests noted above.
COVID-19
The World Health Organization declared a Public Health Emergency of International Concern relating to COVID-19 on Jan. 30, 2020, which they subsequently declared, on March 11, 2020, as a global pandemic. The outbreak of COVID-19 has resulted in governments worldwide enacting emergency measures to constrain the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods, self-isolation, physical and social distancing, and the closure of non-essential businesses, have caused significant disruption to businesses globally, which has resulted in an uncertain and challenging economic environment.
The Corporation continued to operate under its business continuity plan, which focused on ensuring that: (a) employees who could work remotely did so and (b) employees who operate and maintain our facilities, and who were not able to work remotely, were able to work safely and in a manner that ensured they remained healthy. During the second and third quarters of 2020, the Corporation successfully brought employees who were working remotely back to the office
TRANSALTA CORPORATION M12

Management’s Discussion and Analysis
without compromising health and safety standards. In November 2020, as a result of rising COVID-19 case counts in the Province of Alberta and in light of office attendance restrictions eventually imposed by the Government of Alberta, staff at TransAlta's head office returned to remote work protocols. All of TransAlta's offices and sites follow strict health screening and social distancing protocols with personal protective equipment readily available and in use. Further, TransAlta maintains travel bans aligned to local jurisdictional guidance, enhanced cleaning procedures, revised work schedules, contingent work teams and the reorganization of processes and procedures to limit contact with other employees and contractors on-site.
While our results have been impacted by price and demand as a result of COVID-19, all of our facilities continue to remain fully operational and capable of meeting our customers' needs. The Corporation continues to work and serve all of our customers and counterparties under the terms of their contracts. We have not experienced interruptions to service requirements. Electricity and steam supply continues to remain a critical service requirement to all of our customers and has been deemed an essential service in our jurisdictions.
During the second quarter of 2020, the Government of Canada passed the Canada Emergency Wage Subsidy as part of its COVID-19 Economic Response Plan. The program's intent is to support employment by providing expense relief to companies that experienced revenue declines in 2020. In January 2021, TransAlta applied for support under this program and expects to receive $8 million (pre-tax) for application periods in 2020. This represents a portion of the funding that the Corporation is eligible for and funds will be used to support a strategy to add incremental employment within the Corporation. The Corporation will recognize these wage subsidies as funds are received in 2021.
The Corporation continues to maintain a strong financial position due in part to its long-term contracts and hedged positions. At year-end, we had access to $2.1 billion in liquidity, including $703 million in cash and cash equivalents.
Strategic Investment by Brookfield
On March 22, 2019, the Corporation entered into an agreement (the "Investment Agreement") whereby Brookfield agreed to invest $750 million in the Corporation. The Brookfield Investment provides the financial flexibility to drive TransAlta's transition to 100 per cent clean electricity by 2025, recognizes the anticipated future value of TransAlta's Alberta Hydro Assets and accelerates the Corporation's plan to return capital to its shareholders. As discussed in the Corporate Strategy section of this MD&A, the Brookfield Investment was key to the implementation and advancement of TransAlta's Clean Energy Investment Plan, including facilitating or accelerating several key pillars of our strategic plan.
Under the terms of the Investment Agreement, Brookfield agreed to invest $750 million in TransAlta through the purchase of exchangeable securities, which are exchangeable by Brookfield into an equity ownership interest in TransAlta’s Alberta Hydro Assets in the future at a value based on a multiple of the Alberta Hydro Assets’ future-adjusted EBITDA. Upon entering into the Investment Agreement and as required under the terms of the agreement, the Corporation paid Brookfield a $7.5 million-structuring fee. A commitment fee of $15 million was also paid upon completion of the initial funding. These transaction costs were recognized as part of the carrying value of the unsecured subordinated debentures issued at that time.
On May 1, 2019, Brookfield invested the initial tranche of $350 million in exchange for seven per cent unsecured subordinated debentures due May 1, 2039. On Oct. 30, 2020, Brookfield invested the second tranche of $400 million in consideration for redeemable, retractable first preferred shares. The proceeds from the first tranche were used to accelerate our conversion to gas program. The Corporation intends to use the proceeds from the second tranche of the financing to advance the Corporation’s conversion to gas program, fund other growth initiatives and for general corporate purposes.
TransAlta has indicated that it intends to return up to $250 million of capital to shareholders through share repurchases within three years of receiving the first tranche of the Brookfield Investment. As of Dec. 31, 2020, 15,068,900 common shares have been repurchased in 2020 and 2019 for $129 million under the normal course issuer bid ("NCIB") program.
Under the terms of the Investment Agreement, Brookfield committed to purchase TransAlta common shares on the open market to increase its share ownership in TransAlta to not less than nine per cent by May 1, 2021. As of Jan. 8, 2021, Brookfield, through its affiliates, held, owned or had control over an aggregate of 33,845,685 common shares, representing approximately 12.4 per cent of the issued and outstanding common shares, calculated on an undiluted basis. In connection with the Investment Agreement, Brookfield is entitled to nominate two directors for election to the Board.
TRANSALTA CORPORATION M13

Management’s Discussion and Analysis
In accordance with the terms of the Investment Agreement, TransAlta has formed a Hydro Assets Operating Committee
consisting of two representatives from Brookfield and two representatives from TransAlta to collaborate in connection with the operation and maximization of the value of the Alberta Hydro Assets. In connection with this, the Corporation has committed to pay Brookfield an annual fee of $1.5 million for six years beginning May 1, 2019 (the "Brookfield Hydro Fee"), which is recognized in the OM&A expense on the Consolidated Statements of Earnings (Loss).
On April 23, 2019, the Mangrove Partners Master Fund Ltd. ("Mangrove") commenced an action in the Ontario Superior Court of Justice alleging, among other things, oppression by the Corporation and its directors and seeking to set aside the Brookfield Investment. TransAlta believes the claim is wholly lacking in merit and is taking all steps to defend against the allegations. This matter was adjourned due to the COVID-19 pandemic and is now scheduled to proceed to trial for three weeks starting April 19, 2021. Please refer to the Other Consolidated Analysis section of this MD&A for additional information on the Mangrove proceedings.
Centralia Unit 1 Retirement
The Corporation owns a two-unit 1,340 MW thermal coal-fired facility in Centralia, Washington, in relation to which we have entered into a number of multiple year medium- and short-term energy sales agreements. In 2011, Washington State passed the TransAlta Energy Transition Bill (chapter 180, Laws of 2011) (the "Bill'') allowing the Centralia thermal facility to comply with the state's GHG emissions performance standards by ceasing coal generation in one of its two boilers by the end of 2020, and the other by the end of 2025. The Bill removed restrictions that had previously been imposed on the facility limiting the duration of new contracts from the facility and limiting the technology that the facility would be required to implement for nitrogen oxide ("NO x ") controls. Centralia Unit 1 was retired from service effective Dec. 31, 2020.
Accelerated Shutdown of the Highvale Mine
During the third quarter of 2020, the Board approved the accelerated shutdown of the Highvale mine by the end of 2021 and, accordingly, the useful life of the related assets was adjusted to align with the Corporation's conversion to gas plans. As at Dec. 31, 2020, the carrying value of the Highvale mine, including property, plant and equipment ("PP&E"), right-of-use assets and intangible assets, was $373 million. As a result, our cost per tonne of coal will increase as the fixed coal costs will be spread over lower volumes. During the second half of 2020, the increased depreciation expense and our cost per tonne of coal exceeded the net realizable value of the coal inventory and a writedown of $37 million was recognized in fuel, carbon compliance and purchased power. As the Highvale mine moves into the reclamation phase, our anticipated coal consumption is expected to continue to decline, further increasing the cost of coal and future expected writedowns in fuel costs. In 2020, we started the year with 2.1 million tonnes of coal inventory, during which we mined an additional 2.3 million tonnes and consumed 3.5 million tonnes. We ended the year with approximately one million tonnes of coal inventory and we will continue to actively deplete our coal stock as we wind down our mining activity by the end of 2021.
Normal Course Issuer Bid
On May 26, 2020, the Corporation announced that the TSX accepted the notice filed by the Corporation to implement an NCIB for a portion of its common shares. Pursuant to the NCIB, the Corporation may repurchase up to a maximum of 14,000,000 common shares, representing approximately 7.02 per cent of its public float of common shares, as at May 25, 2020. Purchases under the NCIB may be made through open market transactions on the TSX and any alternative Canadian trading platforms on which the common shares are traded, based on the prevailing market price. Any common shares purchased under the NCIB will be cancelled.
The period during which the Corporation is authorized to make purchases under the NCIB began on May 29, 2020 and ends on May 28, 2021, or such earlier date on which the maximum number of common shares are purchased under the NCIB or the NCIB is terminated at the Corporation's election.
Under TSX rules, not more than 228,157 common shares (being 25 per cent of the average daily trading volume on the TSX of 912,630 common shares for the six months ended April 30, 2020) can be purchased on the TSX on any single trading day under the NCIB, with the exception that one block purchase in excess of the daily maximum is permitted per calendar week.
During the year ended Dec. 31, 2020, under the current and previous NCIB, the Corporation purchased and cancelled a total of 7,352,600 common shares at an average price of $8.33 per common share, for a total cost of $61 million.
TRANSALTA CORPORATION M14

Management’s Discussion and Analysis
Management Changes
On Feb. 4, 2021, we announced that that Dawn Farrell, President and Chief Executive Officer, will retire from the Corporation and the Board on March 31, 2021, after leading the Corporation for almost a decade. John Kousinioris, currently Chief Operating Officer and, until his resignation on Feb. 5, 2021, President of TransAlta Renewables, will succeed Ms. Farrell as President and Chief Executive Officer and will join the Board on April 1, 2021. Prior to his appointment as Chief Operating Officer of TransAlta, Mr. Kousinioris held the roles of Chief Growth Officer and Chief Legal and Compliance Officer and Corporate Secretary at TransAlta. In the role of Chief Growth Officer, Mr. Kousinioris was responsible for overseeing the areas of business development, gas and renewables operations, and commercial and energy marketing.
On Feb. 6, 2021, Todd Stack, the Executive Vice President, Finance and Chief Financial Officer of the Corporation, accepted the position of President of TransAlta Renewables. Mr. Stack was promoted to Chief Financial Officer of the Corporation on May 16, 2019. Prior to being appointed as Chief Financial Officer, Mr. Stack served as Managing Director and Corporate Controller of the Corporation, and has been responsible for providing leadership and direction over TransAlta’s financial activities, corporate accounting, reporting, tax and corporate planning. Since joining TransAlta in 1990, Mr. Stack has acted as the Corporation's Treasurer, Corporate Controller, as well as a member of Corporate Development, and he played a prominent role in the growth and the initial public offering of TransAlta Renewables. Prior to joining the finance team, Mr. Stack held a number of roles in the engineering team, including design, operations and project management.
During the first quarter of 2021, Brett Gellner, our Chief Development Officer, announced he will retire effective April 30, 2021. Mr. Gellner has been employed with TransAlta for almost 13 years and during this time he has fulfilled multiple roles in commercial, finance, growth and strategy and served as our Chief Financial Officer. Mr. Gellner has built a reputation amongst investors and the broader community as a highly respected key leader in the power industry. He was central in TransAlta's recent corporate transformations and developing the Clean Energy Investment Plan. Mr. Gellner will remain on TransAlta Renewables' Board of Directors.
The roles of Chief Operating Officer and Chief Development Officer will not be backfilled.
Board of Director Changes
On April 21, 2020, we announced that the Board appointed John P. Dielwart as Chair of the Board, upon his re-election as an independent director at TransAlta’s annual shareholder meeting. As previously announced, Ambassador Gordon Giffin, the previous Chair of the Board, retired from the Board after serving as Chair since 2011.
Mr. Dielwart has served as an independent director on the Board since 2014, and has also served as the Chair of the Governance, Safety and Sustainability Committee and as a member of the Investment Performance Committee and the Audit, Finance and Risk Committee of the Board. Mr. Dielwart is a founder and director of ARC Resources Ltd. from 1996 to present and served as Chief Executive Officer of ARC Resources Ltd. from 2001 to 2013. Mr. Dielwart earned a Bachelor of Science (Distinction) in Civil Engineering from the University of Calgary, is a member of the Association of Professional Engineers and Geoscientists of Alberta and a Past-Chairman of the Board of Governors of the Canadian Association of Petroleum Producers. Mr. Dielwart is also a director and former Co-Chair of the Calgary and Area Child Advocacy Centre. In 2015, Mr. Dielwart was inducted into the Calgary Business Hall of Fame.
Also effective April 21, 2020, Sandra Sharman joined the Board. Ms. Sharman leads the Human Resources, Communications, Marketing and Enterprise Real Estate teams at CIBC, supporting execution of business strategy and enabling a world-class culture. A proven business leader with over 30 years of human resources and financial services experience in both Canada and the US, Ms. Sharman has played a leading role in shaping an inclusive and collaborative culture at CIBC, focused on empowering and enabling employees to reach their full potential. Ms. Sharman assumed the leadership of Human Resources at CIBC in 2014 and added accountability for communications and public affairs in 2017. Since 2017, her portfolio has expanded to encompass purpose, brand, marketing and most recently, corporate real estate. Ms. Sharman earned her Masters of Business Administration (MBA) from Dalhousie University. At TransAlta, Ms. Sharman is a member of the Governance, Safety and Sustainability Committee and the Human Resources Committee.
Robert Flexon resigned from the Board effective Aug. 1, 2020. Mr. Flexon assumed the role of Chair of the Board of Directors of PG&E Corporation (“PG&E”) and resigned from the Board due only to the potential for perceived conflicts of interests between PG&E and the Corporation.
Please refer to the Corporate Strategy section of this MD&A for further updates on ongoing projects.
TRANSALTA CORPORATION M15

Management’s Discussion and Analysis
Please refer to Note 4 of the consolidated financial statements within our 2020 Annual Integrated Report for significant events impacting both prior and current year results.
Segmented Comparable Results
Segmented cash flow generated by the business measures the net cash generated by each of our segments after sustaining and productivity capital expenditures, principal payments on lease liabilities, reclamation costs and provisions. This is the cash flow available to pay our interest and cash taxes, make distributions to our non-controlling partners, pay dividends to our preferred shareholders, grow the business, pay down debt and return capital to our shareholders.
The table below shows the segmented cash flow generated by the business by each of our segments:

Year ended Dec. 31 | 2020 | 2019 | 2018
Segmented cash flow(1) |  |  |
Hydro | 83 |  | 93 |  | 96 |
Wind and Solar | 241 |  | 206 |  | 211 |
North American Gas(2) | 109 |  | 99 |  | 228 |
Australian Gas | 114 |  | 112 |  | 136 |
Alberta Thermal(3)(4) | 47 |  | 214 |  | 279 |
Centralia(3) | 122 |  | 54 |  | 63 |
Generation segmented cash flow | 716 |  | 778 |  | 1,013 |
Energy Marketing | 114 |  | 105 |  | 33 |
Corporate(5) | (100) |  | (92) |  | (107) |
Total segmented cash flow | 730 |  | 791 |  | 939 |
Total segmented cash flow – excluding the PPA Termination Payments | 730 |  | 735 |  | 782 |

(1) Segmented cash flow is a non-IFRS measure and has no standardized meaning under IFRS. Please refer to the Additional IFRS Measures and Non-IFRS Measures section for further details.
(2) This segment was previously known as the Canadian Gas segment but was renamed with the acquisition of the US cogeneration facility in the second quarter of 2020.
(3) The Canadian Coal segment was renamed Alberta Thermal and the US Coal segment was renamed Centralia in the third quarter of 2020.
(4) Includes $157 million received from the Balancing Pool for the early termination of Sundance B and C PPAs in the first quarter of 2018 and $56 million received on settlement of the dispute with the Balancing Pool in the third quarter of 2019.
(5) Includes gains and losses on the total return swap.
Segmented cash flow generated by the business, after adjusting for the PPA Termination Payments, was consistent in 2020 compared to 2019, primarily due to higher performance in our Centralia, Wind and Solar, North American Gas and Energy Marketing segments. This was offset by lower power demand and production in our Alberta Thermal segment and the impact of the total return swap recognized in 2019 in the Corporate segment.
Cash flow in 2019, after adjusting for the PPA Termination Payments, was down $47 million in 2019 compared to 2018, mainly due to the expiry of the Mississauga Non-Utility Generator ("NUG") Enhanced Dispatch Contract (the "NUG Contract") and lower scheduled repayments on the Poplar Creek finance lease, partially offset by strong cash flows from Energy Marketing as well as lower sustaining capital expenditures.
TRANSALTA CORPORATION M16

Management’s Discussion and Analysis
Hydro

Year ended Dec. 31 | 2020 | 2019 | 2018
Production |  |  |
Energy contracted |  |  |
Alberta Hydro PPA assets (GWh)(1) | 1,703 |  | 1,653 |  | 1,519 |
Other hydro energy (GWh)(1) | 353 |  | 331 |  | 306 |
Energy merchant |  |  |
Other hydro energy (GWh) | 76 |  | 61 |  | 81 |
Total energy production (GWh) | 2,132 |  | 2,045 |  | 1,906 |
Ancillary service volumes (GWh)(2) | 2,857 |  | 2,978 |  | 3,265 |
Gross installed capacity (MW) | 926 |  | 926 |  | 926 |
Revenues |  |  |
Alberta Hydro PPA assets energy | 87 |  | 101 |  | 90 |
Alberta Hydro PPA assets ancillary | 66 |  | 90 |  | 104 |
Capacity payments received under Alberta Hydro PPA(3) | 60 |  | 57 |  | 56 |
Other revenue(4) | 45 |  | 44 |  | 41 |
Total gross revenues | 258 |  | 292 |  | 291 |
Net payment relating to Alberta Hydro PPA(5) | (106) |  | (136) |  | (135) |
Revenues | 152 |  | 156 |  | 156 |
Fuel and purchased power | 8 |  | 7 |  | 6 |
Comparable gross margin | 144 |  | 149 |  | 150 |
Operations, maintenance and administration | 37 |  | 36 |  | 38 |
Taxes, other than income taxes | 2 |  | 3 |  | 3 |
Comparable EBITDA | 105 |  | 110 |  | 109 |
Deduct: |  |  |
Sustaining capital: |  |  |
Routine capital | 12 |  | 7 |  | 4 |
Planned major maintenance | 8 |  | 7 |  | 8 |
Total sustaining capital expenditures | 20 |  | 14 |  | 12 |
Productivity capital | — |  | 1 |  | 1 |
Total sustaining and productivity capital | 20 |  | 15 |  | 13 |
Provisions | 2 |  | — |  | — |
Decommissioning and restoration costs settled | — |  | 2 |  | — |
Hydro cash flow | 83 |  | 93 |  | 96 |

(1) Alberta Hydro PPA assets include 13 hydro facilities on the Bow and North Saskatchewan river systems included under the PPA legislation. Other hydro facilities include our hydro facilities in BC and Ontario and the hydro facilities in Alberta not included in the legislated PPAs.
(2) Ancillary services as described in the AESO Consolidated Authoritative Document Glossary.
(3) Capacity payments include the annual capacity charge as described in the Power Purchase Arrangements Determination Regulation AR 175/2000, available from Alberta Queen's Printer. The PPA expired on Dec. 31, 2020.
(4) Other revenue includes revenues from our non-PPA hydro facilities, our transmission business and other contractual arrangements including the flood mitigation agreement with the Alberta government and black start services.
(5) The net payment relating to the Alberta Hydro PPA represents the Corporation's financial obligations for notional amounts of energy and ancillary services in accordance with the Alberta Hydro PPA that expired on Dec. 31, 2020.
TRANSALTA CORPORATION M17

Management’s Discussion and Analysis
2020
Production for 2020 increased by 87 GWh over 2019, primarily due to higher water resources.
Ancillary service volumes for 2020 decreased by 121 GWh compared to 2019. This was primarily due to the AESO procuring lower ancillary volumes in 2020. Additionally, there has been weaker market conditions for ancillary services, partially due to COVID-19 and reduced industrial demand in Alberta.

| 2020 | 2019 | 2018
Gross Revenues per MWh |  |  |
Alberta Hydro PPA assets energy ($/MWh) | $51 | $61 | $59
Alberta Hydro PPA assets ancillary ($/MWh) | $23 | $30 | $32

In 2020, Alberta Hydro energy revenue per MWh of production decreased by approximately $10 per MWh, compared to 2019, as result of lower merchant prices in Alberta.
In 2020, Alberta Hydro ancillary revenue per MWh of production decreased by approximately $7 per MWh, compared to 2019. Lower realized prices were primarily due to unfavourable market conditions in Alberta in 2020. For further discussion on the market conditions and pricing, please refer to the Competitive Forces section of this MD&A.
Total gross revenues for 2020 decreased $34 million compared to 2019, as lower energy and ancillary services revenues resulted from lower Alberta pricing and lower demand for ancillary products, partially offset by higher water resources.
Comparable EBITDA for 2020 decreased by $5 million compared to 2019, from lower revenues partially offset by recoveries allocated by the AESO related to the AESO transmission line loss proceeding. For additional information, please see Note 36 Commitments & Contingencies within the financial statements.
Sustaining capital expenditures for 2020 were $6 million higher than in 2019, due to more planned outages in 2020.
Hydro's cash flow decreased by $10 million for 2020 compared to 2019 mainly due to lower EBITDA and higher sustaining capital spend, partially offset by lower settlements of decommissioning and restoration costs.
2019
Production for 2019 increased by 139 GWh over 2018 primarily due to higher water resources.
Total gross revenues were comparable to 2018 as the Hydro business optimized its revenue through a combination of
energy sales and ancillary services, which allows us to maintain consistent revenues year-over-year.
Comparable EBITDA for 2019 increased by $1 million compared to 2018, as we were able to reduce OM&A due to cost-saving initiatives, while absorbing the $1.5 million Brookfield Hydro Fee.
Hydro's cash flow decreased by $3 million for 2019 compared to 2018 mainly due to higher capital expenditures and
decommissioning costs related to transmission assets.
TRANSALTA CORPORATION M18

Management’s Discussion and Analysis
Wind and Solar

Year ended Dec. 31 | 2020 | 2019 | 2018
Availability (%) | 95.1 | 95.0 | 95.4 |
Contract production (GWh) | 2,871 |  | 2,395 |  | 2,363 |
Merchant production (GWh) | 1,198 |  | 960 |  | 1,005 |
Total production (GWh) | 4,069 |  | 3,355 |  | 3,368 |
Gross installed capacity (MW)(1) | 1,572 |  | 1,495 |  | 1,382 |
Revenues | 334 |  | 295 |  | 302 |
Fuel and purchased power | 25 |  | 16 |  | 17 |
Comparable gross margin | 309 |  | 279 |  | 285 |
Operations, maintenance and administration | 53 |  | 50 |  | 50 |
Taxes, other than income taxes | 8 |  | 8 |  | 8 |
Net other operating income(2) | — |  | (10) |  | (6) |
Comparable EBITDA | 248 |  | 231 |  | 233 |
Deduct: |  |  |
Sustaining capital: |  |  |
Routine capital | — |  | 2 |  | 5 |
Planned major maintenance | 13 |  | 11 |  | 8 |
Total sustaining capital expenditures | 13 |  | 13 |  | 13 |
Productivity capital | 1 |  | — |  | 2 |
Total sustaining and productivity capital | 14 |  | 13 |  | 15 |
Provisions | (8) |  | — |  | — |
Principal payments on lease liabilities | 1 |  | 1 |  | — |
Decommissioning and restoration costs settled | — |  | 1 |  | 1 |
Other(2) | — |  | 10 |  | 6 |
Wind and Solar cash flow | 241 |  | 206 |  | 211 |

(1) 2020 gross installed capacity includes the WindCharger battery storage facility and our proportionate share of the Skookumchuck wind facility. The 2020 and 2019 gross installed capacity includes the addition of Big Level and Antrim, partially offset by the reduction of wind turbines due to tower fires at Wyoming Wind and Summerview.
(2) Relates to insurance proceeds included in net other operating income.
2020
Availability for the year ended Dec. 31, 2020, was consistent with 2019, which was in line with our expectations.
Production for the year ended Dec. 31, 2020, increased 714 GWhs, mainly due to the Big Level and Antrim wind facilities commencing commercial operations in December 2019 and strong wind resources across all regions in 2020, in particular for our Alberta wind facilities.
Comparable EBITDA for 2020 increased by $17 million compared to 2019, primarily due to the addition of the Big Level and Antrim wind facilities and higher production, partially offset by insurance proceeds received in 2019, lower Alberta pricing and the planned expiry of certain wind power production incentives in 2019. In addition, during 2020, the AESO began issuing invoices pertaining to the AESO transmission line loss. Wind and Solar has been allocated $8 million in costs in 2020, which has been reflected in fuel and purchased power within the current year. For additional information, please refer to Note 36 Commitments & Contingencies within the financial statements.
Sustaining and productivity capital expenditures for 2020 were consistent with 2019.
Wind and Solar's cash flow increased by $35 million for the year ended Dec. 31, 2020, compared to the prior year, mainly due to higher comparable EBITDA and insurance proceeds received in 2019, partially offset by higher sustaining and productivity capital spend for Kent Hills foundation expenditures.
TRANSALTA CORPORATION M19

Management’s Discussion and Analysis
2019
Availability and production for the year ended Dec. 31, 2019, was comparable to 2018, which was in line with our expectations. The Big Level and Antrim wind facilities had minimal impact on 2019 availability and production due to their commercial operation occurring in late December.
Comparable EBITDA for 2019 was consistent with 2018. Higher insurance proceeds from tower fires at Wyoming Wind and Summerview were partially offset by a reduction in revenues due to the scheduled expiration of production-based incentives for three wind facilities.
Wind and Solar's cash flow decreased by $5 million for the year ended Dec. 31, 2019, compared to the prior year, mainly due to lower revenue.
North American Gas(1)

Year ended Dec. 31 | 2020 | 2019 | 2018
Availability (%) | 96.9 | 94.8 | 93.3 |
Contract production (GWh) | 1,896 |  | 1,655 |  | 1,620 |
Merchant production (GWh)(2) | 131 |  | 262 |  | 172 |
Purchased power (GWh)(2) | (198) |  | (92) |  | (79) |
Total production (GWh) | 1,829 |  | 1,825 |  | 1,713 |
Gross installed capacity (MW)(3) | 974 |  | 945 |  | 945 |
Revenues | 234 |  | 238 |  | 407 |
Fuel and purchased power | 66 |  | 74 |  | 99 |
Comparable gross margin | 168 |  | 164 |  | 308 |
Operations, maintenance and administration | 49 |  | 44 |  | 48 |
Taxes, other than income taxes | 2 |  | 1 |  | 1 |
Net other operating income | — |  | (1) |  | — |
Comparable EBITDA | 117 |  | 120 |  | 259 |
Deduct: |  |  |
Sustaining capital: |  |  |
Routine capital | 4 |  | 10 |  | 4 |
Planned major maintenance | 2 |  | 8 |  | 16 |
Total sustaining capital expenditures | 6 |  | 18 |  | 20 |
Productivity capital | — |  | — |  | 2 |
Total sustaining and productivity capital | 6 |  | 18 |  | 22 |
Provisions and other | — |  | — |  | 9 |
Decommissioning and restoration costs settled | 2 |  | 3 |  | — |
North American Gas cash flow | 109 |  | 99 |  | 228 |

(1) This segment was previously known as the Canadian Gas segment but was renamed with the acquisition of the Ada facility in the second quarter of 2020. See the Corporate Strategy section of this MD&A and Note 4 of the consolidated financial statements for further details.
(2) Purchased power used for dispatch optimization has been separated from merchant production in the current year. Comparable periods have been adjusted to reflect this change.
(3) 2020 includes 29 MW for the acquisition of the Ada facility in the second quarter of 2020.
TRANSALTA CORPORATION M20

Management’s Discussion and Analysis
2020
Availability for the year ended Dec. 31, 2020, increased compared to 2019, primarily due to lower planned and unplanned outages at our Fort Saskatchewan, Sarnia and Ottawa facilities, partially offset by planned outages at the Ada facility.
Production was consistent with 2019. Higher customer demand at our Sarnia facility and the addition of the Ada facility was offset by lower Ontario market demand in 2020. Due to low power pricing in Ontario, we settled some customer power purchases with power purchased from the merchant market. Overall, due to the nature of our contracts, changes in production do not have a significant financial impact as our contracts are structured as capacity payments with customer-supplied fuel or a pass-through of fuel costs.
OM&A costs for 2020 were $5 million higher than in 2019, due to the addition of the new Ada facility and the new recontracted terms of the Fort Saskatchewan commercial agreement.
Comparable EBITDA for 2020 decreased by $3 million compared to 2019, mainly due to lower earnings at Fort Saskatchewan as the new commercial agreement was negatively impacted by lower merchant pricing in Alberta, partially offset by the addition of the Ada facility.
Sustaining capital expenditures in 2020 decreased by $12 million mainly due to a major planned outage for Sarnia in 2019.
Cash flow at North American Gas increased by $10 million for the year ended Dec. 31, 2020, compared to the prior year mainly due to lower sustaining capital, partially offset by lower comparable EBITDA.
2019
Availability for the year ended Dec. 31, 2019, increased compared to 2018, primarily due to lower planned outages at Fort Saskatchewan and Sarnia.
Production for the year increased by 112 GWh compared to 2018, mainly due to higher customer and market demand as well as lower planned outages, partially offset by higher unplanned outages.
Comparable EBITDA for 2019 decreased by $139 million compared to 2018 mainly due to the Mississauga contract ending Dec. 31, 2018, and lower scheduled payments from the Poplar Creek finance lease. Comparable EBITDA for the year ended Dec. 31, 2019, includes nil (2018 — $105 million) and $20 million (2018 — $57 million) from the Mississauga and Poplar Creek contracts, respectively. Additionally, comparable EBITDA benefited from lower OM&A compared to
the prior year as a result of reduced overhead and operating costs.
Sustaining capital totalled $18 million in 2019, a decrease of $2 million due to lower planned outage costs, partially offset by the timing of capital spares purchases for Sarnia.
Cash flow at Canadian Gas decreased by $129 million for the year ended Dec. 31, 2019, compared to the prior year mainly due to lower comparable EBITDA.
TRANSALTA CORPORATION M21

Management’s Discussion and Analysis
Australian Gas

Year ended Dec. 31 | 2020 | 2019 | 2018
Availability (%) | 93.8 | 90.6 | 94.0 |
Contract production (GWh) | 1,779 |  | 1,832 |  | 1,814 |
Gross installed capacity (MW) | 450 |  | 450 |  | 450 |
Revenues | 162 |  | 160 |  | 165 |
Fuel and purchased power | 6 |  | 5 |  | 4 |
Comparable gross margin | 156 |  | 155 |  | 161 |
Operations, maintenance and administration | 32 |  | 37 |  | 37 |
Comparable EBITDA | 124 |  | 118 |  | 124 |
Deduct: |  |  |
Sustaining capital: |  |  |
Routine capital | 3 |  | 2 |  | 2 |
Planned major maintenance | 6 |  | 3 |  | — |
Total sustaining capital expenditures | 9 |  | 5 |  | 2 |
Productivity capital | 1 |  | 1 |  | — |
Total sustaining and productivity capital | 10 |  | 6 |  | 2 |
Other | — |  | — |  | (14) |
Australian Gas cash flow | 114 |  | 112 |  | 136 |

2020
Availability for the year ended Dec. 31, 2020, increased compared to 2019, mainly due to unplanned outages in 2019.
Production for 2020 decreased compared to 2019, mainly due to changes in customer demand at the South Hedland facility. Due to the nature of our contracts, changes in production do not have a significant financial impact as our contracts are structured as capacity payments with customer-supplied fuel or a pass-through of fuel costs.
Comparable EBITDA for the year ended Dec. 31, 2020, increased by $6 million compared to 2019, due to the deferral of legal costs associated with our dispute with Fortescue Metals Group Ltd ("FMG"), reduced staffing due to cost controls and the strengthening of the Australian dollar against the Canadian dollar.
Sustaining and productivity capital for 2020 increased by $4 million compared to 2019, mainly due to planned major maintenance at our Southern Cross facility.
Australian Gas' cash flow increased by $2 million in 2020, mainly due to higher comparable EBITDA, partially offset by higher sustaining capital expenditures.
2019
Availability for the year ended Dec. 31, 2019, decreased compared to 2018 mainly due to unplanned outages.
Production for 2019 was comparable to 2018. Due to the nature of our contracts, changes in production do not have a significant financial impact as our contracts are structured as capacity payments with customer-supplied fuel or a pass-through of fuel costs.
Comparable EBITDA for the year ended Dec. 31, 2019, decreased by $6 million compared to 2018 due to the weakening of the Australian dollar and ongoing legal costs associated with our dispute with FMG.
Sustaining and productivity capital for 2019 increased by $4 million compared to 2018 mainly due to planned major maintenance at our Southern Cross facility.
Cash flow at Australian Gas decreased by $24 million in 2019 mainly due to lower comparable EBITDA, as well as higher sustaining capital expenditures. In addition, 2018 cash flow included the collection of a long-term receivable.
TRANSALTA CORPORATION M22

Management’s Discussion and Analysis
Alberta Thermal(1)

Year ended Dec. 31 | 2020 | 2019 | 2018
Availability (%) | 84.8 | 89.2 |  | 91.6 |
Contract production (GWh) | 5,851 |  | 6,927 |  | 8,936 |
Merchant production (GWh) | 4,186 |  | 5,932 |  | 5,304 |
Total production (GWh) | 10,037 |  | 12,859 |  | 14,240 |
Gross installed capacity (MW)(2) | 2,866 |  | 3,229 |  | 3,231 |
Revenues | 659 |  | 823 |  | 901 |
Fuel, carbon compliance and purchased power(3) | 391 |  | 449 |  | 526 |
Comparable gross margin | 268 |  | 374 |  | 375 |
Operations, maintenance and administration | 131 |  | 138 |  | 171 |
Taxes, other than income taxes | 15 |  | 13 |  | 13 |
Termination of Sundance B and C PPAs | — |  | (56) |  | (157) |
Net other operating income | (40) |  | (40) |  | (41) |
Comparable EBITDA(3) | 162 |  | 319 |  | 389 |
Deduct: |  |  |
Sustaining capital: |  |  |
Routine capital | 16 |  | 15 |  | 17 |
Mine capital | 7 |  | 23 |  | 42 |
Planned major maintenance | 62 |  | 34 |  | 15 |
Total sustaining capital expenditures | 85 |  | 72 |  | 74 |
Productivity capital | 1 |  | 6 |  | 12 |
Total sustaining and productivity capital | 86 |  | 78 |  | 86 |
Provisions | — |  | (6) |  | (10) |
Principal payments on lease liabilities | 20 |  | 16 |  | 14 |
Decommissioning and restoration costs settled | 9 |  | 17 |  | 19 |
Other | — |  | — |  | 1 |
Alberta Thermal cash flow | 47 |  | 214 |  | 279 |

(1) The Canadian Coal segment was renamed Alberta Thermal in the third quarter of 2020.
(2) All years include 406 MW for Sundance Unit 5, which is temporarily mothballed. Sheerness Unit 2's capacity was increased in 2020 following a generator rewind and final testing. 2019 and 2018 also include 368 MW for Sundance Unit 3, which was temporarily mothballed and then retired during the third quarter of 2020. In addition, the Keephills 3 and Genesee 3 asset swap resulted in a net 2 MW reduction of capacity that occurred in the fourth quarter of 2019.
(3) In 2020, the interest on the line loss provision was reclassified from fuel, carbon compliance and purchased power to interest expense.

Supplemental disclosure | 2020 | 2019 | 2018
Comparable EBITDA – excluding the PPA Termination Payments | 162 |  | 263 |  | 232 |
Alberta Thermal cash flow – excluding the PPA Termination Payments | 47 |  | 158 |  | 122 |

2020
Availability for the year was lower compared to 2019 due to the Sundance Unit 6 planned turnaround and conversion to gas outage occurring in late 2020 and higher unplanned outages and derates. The Sundance Unit 6 return to service was delayed due to unexpected issues identified during recommissioning. Our Keephills Unit 2 has experienced increased outages as we approach the 2021 turnaround outage. Increased derates are attributed to our conversion to gas transition plan and our consumption of lower-quality coal inventory.
Production for the year ended Dec. 31, 2020, decreased 2,822 GWh compared to 2019. This was largely a result of curtailments and dispatch optimization resulting in lower merchant production in the Alberta Thermal fleet due to reduced industrial demand in the province and the impact of COVID-19 on demand generally. Production also decreased due to lower availability.
Revenue for the year ended Dec. 31, 2020, decreased by $164 million compared to 2019, mainly due to lower merchant production.
TRANSALTA CORPORATION M23

Management’s Discussion and Analysis

| 2020 | 2019 | 2018
Revenues per MWh | $66 | $64 | $63
Fuel, carbon compliance and purchased power per MWh | $39 | $35 | $37

In 2020, revenue per MWh of production increased by $2 per MWh in 2020 compared with 2019 primarily due to higher realized prices as a result of optimizing production during periods of favourable pricing and hedging positions minimizing the impact of unfavourable market pricing.
In 2020, fuel, carbon compliance and purchased power costs per MWh of production increased by $4 per MWh compared with 2019. Costs per MWh increased due to fixed coal costs spread over less volumes, resulting in increased costs per MWh.
We continued to co-fire with natural gas, when economic. Natural gas combustion produces fewer GHG emissions than coal combustion, which lowers our GHG compliance costs.
OM&A costs were lower in 2020 compared to 2019 as a result of strong cost controls, reduced staffing in line with conversion to gas transition plans, and a reflection of lower production.
Excluding the PPA Termination Payments, comparable EBITDA for the year ended Dec. 31, 2020, decreased $101 million compared to 2019. Merchant production was lower due to unfavourable market conditions and higher fuel costs.
For the year ended Dec. 31, 2020, sustaining capital expenditures increased by $13 million compared to 2019 mainly due to the major maintenance that occurred during the Sheerness dual-fuel conversion and the Sundance Unit 6 turnaround.
Alberta Thermal cash flow for the year ended Dec. 31, 2020, excluding the PPA Termination Payments, decreased by $111 million compared to 2019 mainly due to lower comparable EBITDA, increased sustaining and productivity capital expenditures and the early settlement of mining equipment leases, partially offset by the deferral of decommissioning expenditures due to COVID-19.
2019
Availability for the year was lower compared to 2018 due to planned outages at our Keephills 1 and Sundance 4 units, whereas 2018 only had one outage at one of our non-operated units; this was partially offset by fewer unplanned losses in 2019.
Production for the year ended Dec. 31, 2019, decreased 1,381 GWh compared to 2018 primarily due to the mothballing of certain Sundance units and planned outages, partially offset by lower unplanned outages. Lower contract production was partially offset by higher merchant production.
Revenue for the year ended Dec. 31, 2019, decreased by $78 million compared to 2018, mainly due to lower production as a result of the termination of the Sundance B and C PPAs on March 31, 2018.
Revenue per MWh of production rose to approximately $64 per MWh in 2019 from $63 per MWh in 2018. Revenues in the first quarter of 2018 included the Sundance B and C PPA revenue as well as the pass-through revenues associated with carbon compliance costs, which are no longer recoverable on the Sundance units as the PPAs have been terminated.
Fuel, carbon compliance and purchased power costs per MWh were lower in 2019 compared to 2018. Cost per MWh of production fell to approximately $35 per MWh in 2019 from $37 per MWh in 2018.
We continued to co-fire with natural gas, when economical. Natural gas combustion produces fewer GHG emissions than coal combustion, which lowers our GHG compliance costs. In addition, fuel costs can be lower by co-firing, depending on the market price for natural gas. On Nov. 1, 2019, the firm contract to transport natural gas on the Pioneer Pipeline began, which substantially increased gas quantities available to us and increased our supply available to co-fire.
TRANSALTA CORPORATION M24

Management’s Discussion and Analysis
OM&A costs were lower in 2019 compared to 2018 as a result of the full-year impact of cost reductions progressively implemented over the preceding year. These cost reductions arose from a combination of factors that included fewer units operating, lower capacity factor operation on merchant units, co-firing with gas, and operations and maintenance work optimization.
Excluding the PPA Termination Payments, comparable EBITDA for the year ended Dec. 31, 2019, increased $31 million compared to 2018. This largely reflects lower fuel, carbon compliance and purchased power costs, as well as lower OM&A costs.
For the year ended Dec. 31, 2019, sustaining capital expenditures decreased by $2 million compared to 2018, mainly due to less mine development work being completed in 2019, partially offset by higher spend on planned major maintenance. In 2018, there was only one planned major outage at one of our non-operating units, while during 2019 there were two planned major outages at the Keephills 1 and Sundance 4 units.
Alberta Thermal's cash flow for the year ended Dec. 31, 2019, increased by $36 million (excluding the PPA Termination Payments) compared to 2018, mainly due to higher comparable EBITDA and decreased sustaining and productivity capital expenditures.
Centralia(1)

Year ended Dec. 31 | 2020 | 2019 | 2018
Availability (%) | 76.2 |  | 74.0 |  | 60.2 |
Adjusted availability (%)(2) | 90.2 |  | 83.5 |  | 84.6 |
Contract sales volume (GWh) | 3,338 |  | 3,329 |  | 3,329 |
Merchant sales volume (GWh) | 5,571 |  | 7,691 |  | 5,704 |
Purchased power (GWh) | (3,775) |  | (3,865) |  | (3,665) |
Total production (GWh) | 5,134 |  | 7,155 |  | 5,368 |
Gross installed capacity (MW) | 1,340 |  | 1,340 |  | 1,340 |
Revenues | 483 |  | 559 |  | 471 |
Fuel and purchased power | 279 |  | 416 |  | 314 |
Comparable gross margin | 204 |  | 143 |  | 157 |
Operations, maintenance and administration | 60 |  | 67 |  | 61 |
Taxes, other than income taxes | 5 |  | 3 |  | 5 |
Comparable EBITDA | 139 |  | 73 |  | 91 |
Deduct: |  |  |
Sustaining capital: |  |  |
Routine capital | 3 |  | 2 | 2 |
Planned major maintenance | 7 |  | 5 | 11 |
Total sustaining capital expenditures | 10 |  | 7 | 13 |
Productivity capital | — |  | 1 | — |
Total sustaining and productivity capital | 10 |  | 8 | 13 |
Principal payments on lease liabilities | — |  | — |  | 4 |
Decommissioning and restoration costs settled | 7 |  | 11 | 11 |
Centralia cash flow | 122 |  | 54 | 63 |

(1) The US Coal segment was renamed Centralia in the third quarter of 2020.
(2) Adjusted for dispatch optimization.
2020
Adjusted availability for the year increased compared to 2019 due to lower forced outages and derates in 2020. In the first half of 2019, Centralia Unit 1 had significant derates that were resolved and not experienced in 2020.
Production decreased by 2,021 GWh in 2020 compared to 2019 due mainly to lower merchant pricing throughout 2020 and timing of dispatch optimization. In 2020, both Centralia units were taken out of service in February and March as a result of seasonally lower prices in the Pacific Northwest, whereas in 2019 both units remained in service into April due to higher prices in the Pacific Northwest.
TRANSALTA CORPORATION M25

Management’s Discussion and Analysis
OM&A costs were $7 million lower in 2020 compared to 2019 mainly due to lower levels of maintenance required to support an almost 30 per cent decrease in production and strong cost controls.
Comparable EBITDA increased by $66 million compared to 2019, primarily due to increased benefits from dispatch optimization in 2020 and from an isolated and extreme pricing event in March 2019 for $25 million where Centralia was unable to commit one of its units to physical production for day-ahead supply due to an unplanned forced outage repair. In addition, comparable EBITDA in 2020 increased with the strengthening of the US dollar relative to the Canadian dollar throughout the year.
Sustaining and productivity capital expenditures for 2020 were $2 million higher than 2019 mainly due to increased planned outage work performed in 2020 during the reserve shutdown.
Centralia's cash flow for 2020 increased by $68 million compared to the prior year, mainly due to higher comparable EBITDA and deferral of decommissioning expenditures due to COVID-19, partially offset by higher sustaining capital spend.
2019
Adjusted availability for 2019 was down compared to 2018 due to higher forced outages and derates in 2019. Centralia Unit 1 operated with a derate due to blocked precipitator hoppers impacting the first half of 2019. This derate was resolved when the unit was offline during the second quarter of 2019.
Production was up 1,787 GWh in 2019 compared to 2018 due mainly to higher merchant pricing in the first half of 2019 and timing of dispatch optimization. In 2019, both Centralia units remained in service into April due to higher prices in the Pacific Northwest, whereas in 2018, both Centralia units were taken out of service in February as a result of seasonally lower prices in the Pacific Northwest. In 2018, we performed major maintenance on both units during that time.
OM&A costs were $6 million higher in 2019 compared to 2018 mainly due to higher levels of maintenance required to support a 33 per cent increase in production and as a result of higher costs to resolve precipitator blockages.
Comparable EBITDA in 2019 decreased by $18 million compared to 2018, primarily due to an isolated and extreme pricing event in March. Centralia was unable to commit one of its units to physical production for day-ahead supply due to an unplanned forced outage repair.
Sustaining and productivity capital expenditures for 2019 were $5 million lower than 2018, mainly due to less planned outage work performed in 2019.
Centralia's cash flow for 2019 decreased by $9 million compared to 2018, mainly due to lower comparable EBITDA, partially offset by lower sustaining and productivity capital spend.
Energy Marketing

Year ended Dec. 31 | 2020 | 2019 | 2018
Revenues and comparable gross margin | 143 |  | 119 |  | 67 |
Operations, maintenance and administration | 30 |  | 30 |  | 24 |
Comparable EBITDA | 113 |  | 89 |  | 43 |
Deduct: |  |  |
Provisions and other | (1) |  | (16) |  | 10 |
Energy Marketing cash flow | 114 |  | 105 |  | 33 |

2020
Comparable EBITDA for 2020 increased by $24 million compared to 2019. Results were primarily from continued strong performance in both power and natural gas markets. Gains were realized from short-term strategies across various geographic regions aided by market and price volatility. The Energy Marketing team was able to capitalize on short-term arbitrage opportunities in the markets in which we trade without materially changing the risk profile of the business unit. OM&A spending for 2020 and 2019 was similar.
Energy Marketing's cash flows for 2020 increased by $9 million compared to 2019 mainly due to higher comparable EBITDA, partially offset by changes in emissions obligations and prepaid balances for transmission rights.
TRANSALTA CORPORATION M26

Management’s Discussion and Analysis
2019
Comparable EBITDA for 2019 increased by $46 million compared to 2018 results due to strong results from all Energy Marketing segments, with particularly strong performance from US Western and Eastern markets due to continued high levels of volatility. OM&A increased due to higher incentives related to stronger performance. The Energy Marketing team was able to capitalize on short-term arbitrage opportunities in the markets in which we trade without materially changing the risk profile of the business unit.
Energy Marketing's cash flows for 2019 increased by $72 million compared to 2018, mainly due to higher comparable EBITDA and changes in emissions obligations and prepaid balances for transmission rights.
Corporate

Year ended Dec. 31 | 2020 | 2019 | 2018
Operations, maintenance, and administration | 80 |  | 73 |  | 86 |
Taxes, other than income taxes | 1 |  | 1 |  | 1 |
Net other operating loss | — |  | 2 |  | — |
Comparable EBITDA | (81) |  | (76) |  | (87) |
Deduct: |  |  |
Sustaining capital: |  |  |
Routine capital | 14 |  | 12 |  | 16 |
Total sustaining capital expenditures | 14 |  | 12 |  | 16 |
Productivity capital | 1 |  | — |  | 4 |
Total sustaining and productivity capital expenditures | 15 |  | 12 |  | 20 |
Provisions | — |  | — |  | — |
Principal payments on lease liabilities | 4 |  | 4 |  | — |
Corporate cash flow | (100) |  | (92) |  | (107) |

Supplemental disclosure | 2020 | 2019 | 2018
Corporate cash flow | (100) |  | (92) |  | (107) |
Total return swap (gains) losses | 2 |  | (13) |  | (1) |
Adjusted Corporate cash flow | (98) |  | (105) |  | (108) |

2020
Our Corporate overhead costs in 2020 were $81 million, an increase of $5 million compared to $76 million in 2019, primarily due to realized gains and losses from the total return swap. A portion of the settlement cost of our employee share-based payment plans is fixed by entering into total return swaps, which are cash settled every quarter. Excluding the impact of the total return swap, Corporate overhead costs for 2020 decreased by $10 million compared to 2019, mainly due to lower legal fees and lower labour and reduced travel costs, partially offset by additional costs to support growth and development projects, centralization of shared services to the Corporate segment and additional costs incurred to support COVID-19 protocols.
Corporate cash flow, excluding the impact of the total return swap, was also lower in 2020 compared to 2019 due to slightly higher sustaining and productivity capital spend on information technology.
2019
Our Corporate overhead costs in 2019 were $76 million, a decrease of $11 million compared to $87 million in 2018, primarily due to cost-efficiency initiatives and principal payments on lease liabilities. In addition, we realized a net gain of $13 million from the total return swap, which was mostly offset by higher legal costs. Corporate cash flow also benefited from lower sustaining and productivity capital spend due to higher spend in 2018 on automation and new information technology solutions implemented in prior years, which helped contribute to the cost efficiencies realized in 2019.
TRANSALTA CORPORATION M27

Management’s Discussion and Analysis
Additional IFRS Measures and Non-IFRS Measures
An additional IFRS measure is a line item, heading or subtotal that is relevant to an understanding of the consolidated financial statements but is not a minimum line item mandated under IFRS, or the presentation of a financial measure that is relevant to an understanding of the consolidated financial statements but is not presented elsewhere in the consolidated financial statements. We have included line items entitled gross margin and operating income (loss) in our Consolidated Statements of Earnings (Loss) for the years ended Dec. 31, 2020, 2019 and 2018. Presenting these line items provides management and investors with a measurement of ongoing operating performance that is readily comparable from period to period.
We evaluate our performance and the performance of our business segments using a variety of measures to provide management and investors with an understanding of our financial position and results. Certain financial measures discussed in this MD&A are not defined under IFRS, are not standard measures under IFRS and, therefore, should not be considered in isolation or as an alternative to, or to be more meaningful than, net earnings attributable to common shareholders or cash flow from operating activities, as determined in accordance with IFRS when assessing our financial performance or liquidity. These measures may not be comparable to similar measures presented by other issuers and should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. Comparable EBITDA, deconsolidated comparable EBITDA, deconsolidated comparable EBITDA by segment, FFO, deconsolidated FFO, FCF, total net debt, total consolidated net debt, adjusted net debt, deconsolidated net debt and segmented cash flow generated by the business, all as defined below, are non-IFRS measures that are presented in this MD&A. See the Discussion of Consolidated Financial Results, Segmented Comparable Results, Selected Quarterly Information, Key Financial Ratios and Financial Capital sections of this MD&A for additional information, including a reconciliation of such non-IFRS measures to the most comparable IFRS measure.
TRANSALTA CORPORATION M28

Management’s Discussion and Analysis
Discussion of Consolidated Financial Results
Each business segment assumes responsibility for its operating results measured to comparable EBITDA and cash flows generated by the business. Gross margin is also a useful measure as it provides management and investors with a measurement of operating performance that is readily comparable from period to period.
Comparable EBITDA
EBITDA is a widely adopted valuation metric and an important metric for management that represents our core business profitability. Interest, taxes, depreciation and amortization are not included, as differences in accounting treatments may distort our core business results. In addition, under comparable EBITDA we reclassify certain transactions to facilitate the discussion of the performance of our business:
▪Comparable EBITDA is adjusted to exclude the impact of unrealized mark-to-market gains or losses.
▪Any gains or losses on asset sales or foreign exchange gains or losses are not included as these are not part of operating income.
▪Certain assets we own in Canada and in Australia are fully contracted and recorded as finance leases under IFRS. We believe it is more appropriate to reflect the payments we receive under the contracts as a capacity payment in our revenues instead of as finance lease income and a decrease in finance lease receivables.
▪We also reclassify the depreciation on our mining equipment from fuel, carbon compliance and purchased power to reflect the actual cash cost of our business in our comparable EBITDA.
▪Coal inventory writedowns are not included as these are non-cash adjustments that are not reflective of our core business results upon conversion to gas. To accelerate our conversion to gas plans, a decision was made to accelerate the mine shutdown to 2021.
▪In December 2016, we agreed to terminate our existing arrangement with the Independent Electricity System Operator relating to our Mississauga cogeneration facility in Ontario and entered into the NUG Contract effective Jan. 1, 2017. Under the new NUG Contract, we received fixed monthly payments until Dec. 31, 2018, with no delivery obligations. Under IFRS, for our reported results in 2016, as a result of the NUG Contract, we recognized a receivable of $207 million (discounted), a pre-tax gain of approximately $191 million net of costs to mothball the units and accelerated depreciation of $46 million. In 2017 and 2018, on a comparable basis, we recorded the payments we received as revenues as a proxy for operating income and depreciated the facility until Dec. 31, 2018.
▪On the commissioning of the South Hedland facility in July 2017, we prepaid approximately $74 million of electricity transmission and distribution costs. Interest income is recorded on the prepaid funds. We reclassify this interest income as a reduction in the transmission and distribution costs expensed each period to reflect the net cost to the business.
▪In October 2019, we acquired Capital Power's 50 per cent ownership of Keephills 3 in exchange for selling our 50 per cent ownership in the Genesee 3 facility to Capital Power, and we now own 100 per cent of the Keephills 3 facility. As a result, all of the Keephills 3 and Genesee 3 project agreements with Capital Power were terminated, including the agreement governing the supply of coal from TransAlta’s Highvale mine to the Keephills 3 facility. Upon termination of this agreement in the fourth quarter of 2019, the Highvale mine had no future performance obligations and, accordingly, the balance of the contract liability of $88 million was recognized in earnings. On a comparable basis, we removed this gain from 2019 results.
▪Asset impairment charges (reversals) are removed to calculate comparable EBITDA as these are accounting adjustments that impact depreciation and amortization and do not reflect business performance.
▪During the fourth quarter of 2020, we acquired a 49 per cent interest in the Skookumchuck wind facility, which is treated as an equity investment under IFRS and our proportionate share of the net earnings is reflected as equity income on the statement of earnings under IFRS. As this investment is part of our regular power-generating operations, we have included our proportionate share of the comparable EBITDA of Skookumchuck in our total comparable EBITDA. In addition, in the Wind and Solar comparable results, we have included our proportionate share of revenues and expenses to reflect the full operational results of this investment. We have not included EMG's comparable EBITDA in our total comparable EBITDA as it does not represent our regular power-generating operations.
▪During the fourth quarter of 2020, we recorded an onerous contract provision on the coal supply contract for Sheerness as we accelerated our plans to eliminate coal as a fuel source by the end of 2021. This is a one-time charge that is not reflective of ongoing operations and therefore has been removed for comparable EBITDA.
TRANSALTA CORPORATION M29

Management’s Discussion and Analysis
A reconciliation of net earnings (loss) attributable to common shareholders to comparable EBITDA results is set out below:

Year ended Dec. 31 | 2020 | 2019 | 2018
Net earnings (loss) attributable to common shareholders | (336) |  | 52 |  | (248) |
Net earnings attributable to non-controlling interests | 34 |  | 94 |  | 108 |
Preferred share dividends | 49 |  | 30 |  | 50 |
Net earnings (loss) | (253) |  | 176 |  | (90) |
Adjustments to reconcile net income to comparable EBITDA |  |  |
Income tax expense (recovery) | (50) |  | 17 |  | (6) |
Gain on sale of assets and other | (9) |  | (46) |  | (1) |
Foreign exchange (gain) loss | (17) |  | 15 |  | 15 |
Net interest expense | 238 |  | 179 |  | 250 |
Equity income | (1) |  | — |  | — |
Depreciation and amortization | 654 |  | 590 |  | 574 |
Comparable reclassifications |  |  |
Decrease in finance lease receivables | 17 |  | 24 |  | 59 |
Mine depreciation included in fuel cost | 145 |  | 121 |  | 140 |
Australian interest income | 4 |  | 4 |  | 4 |
Unrealized mark-to-market (gains) losses | 46 |  | (33) |  | 38 |
Adjustments to earnings to arrive at comparable EBITDA |  |  |
Impact of Sheerness going off coal(1) | 29 |  | — |  | — |
Impacts associated with Mississauga recontracting(2) | — |  | — |  | 105 |
Gain on termination of Keephills 3 coal rights contract | — |  | (88) |  | — |
Coal inventory writedown | 37 |  | — |  | — |
Asset impairment (3) | 84 |  | 25 |  | 73 |
Share of adjusted EBITDA from joint venture(4) | 3 |  | — |  | — |
Comparable EBITDA | 927 |  | 984 |  | 1,161 |
Comparable EBITDA – excluding the PPA Termination Payments | 927 |  | 928 |  | 1,004 |

(1) During the fourth quarter of 2020, a decision was made to accelerate our plans to eliminate coal as a fuel source at the Sheerness facility by the end of 2021. As such, the existing coal supply contract has been classified as an onerous contract and the remaining expected contract payments have been accrued for in the current year.
(2) Impacts associated with Mississauga facility recontracting for the year ended Dec. 31, 2018, are as follows: revenue ($108 million) and fuel and purchased power and de-designated hedges ($3 million).
(3) Asset impairment for 2020 primarily includes the retirement of Sundance Unit 3 ($70 million), impairment on a BC hydro facility ($2 million), impairment on the Centralia land ($9 million) and asset impairments resulting from changes in discount rates for the decommissioning and restoration liabilities for our retired assets (2019 — $141 million increase for the decommissioning and restoration liability at the Centralia mine, $15 million for trucks held for sale and written down to net realizable value and the $18 million write-off of project development costs, partially offset by a $151 million impairment reversal at Centralia; 2018 — $38 million charge related to the retirement of Sundance Unit 2, Lakeswind and Kent Breeze impairment of $12 million and a write-off of project development costs of $23 million). For further details, please refer to the Critical Accounting Estimates section of this MD&A.
(4) Includes our share of amounts for Skookumchuck, an equity accounted joint venture.
Funds from Operations and Free Cash Flow
Funds from Operations ("FFO") is an important metric as it provides a proxy for cash generated from operating activities before changes in working capital and provides the ability to evaluate cash flow trends in comparison with results from prior periods. FCF is an important metric as it represents the amount of cash that is available to invest in growth initiatives, make scheduled principal repayments on debt, repay maturing debt, pay common share dividends or repurchase common shares. Changes in working capital are excluded so FFO and FCF are not distorted by changes that we consider temporary in nature, reflecting, among other things, the impact of seasonal factors and timing of receipts and payments. FFO per share and FCF per share are calculated using the weighted average number of common shares outstanding during the period.
TRANSALTA CORPORATION M30

Management’s Discussion and Analysis
The table below reconciles our cash flow from operating activities to our FFO and FCF:. (

Year ended Dec. 31 | 2020 | 2019 | 2018
Cash flow from operating activities(1)(2) | 702 |  | 849 |  | 820 |
Change in non-cash operating working capital balances | (89) |  | (121) |  | 44 |
Cash flow from operations before changes in working capital | 613 |  | 728 |  | 864 |
Adjustments |  |  |
Share of adjusted FFO from joint venture(2) | 3 |  | — |  | — |
Decrease in finance lease receivable | 17 |  | 24 |  | 59 |
Coal inventory writedown | 37 |  | — |  | — |
Other | 15 |  | 5 |  | 4 |
FFO | 685 |  | 757 |  | 927 |
Deduct: |  |  |
Sustaining capital(2) | (157) |  | (141) |  | (150) |
Productivity capital | (4) |  | (9) |  | (21) |
Dividends paid on preferred shares | (39) |  | (40) |  | (40) |
Distributions paid to subsidiaries’ non-controlling interests | (102) |  | (111) |  | (169) |
Principal payments on lease liabilities(2) | (25) |  | (21) |  | (18) |
Other | — |  | — |  | (5) |
FCF | 358 |  | 435 |  | 524 |
Weighted average number of common shares outstanding in the year | 275 |  | 283 |  | 287 |
FFO per share | 2.49 |  | 2.67 |  | 3.23 |
FCF per share | 1.30 |  | 1.54 |  | 1.83 |

(1) 2019 and 2018 amounts include the PPA Termination Payments. See the Significant and Subsequent Events section for further details.
(2) Includes our share of amounts for Skookumchuck, an equity accounted joint venture.
The table below bridges our comparable EBITDA to our FFO and FCF:

Year ended Dec. 31 | 2020 | 2019 | 2018
Comparable EBITDA(1) | 927 |  | 984 |  | 1,161 |
Provisions and other | 7 |  | 13 |  | (9) |
Interest expense(2) | (192) |  | (174) |  | (187) |
Current income tax expense(2) | (35) |  | (35) |  | (28) |
Realized foreign exchange gain (loss) | 8 |  | (6) |  | 5 |
Decommissioning and restoration costs settled(2) | (18) |  | (34) |  | (31) |
Other cash and non-cash items | (12) |  | 9 |  | 16 |
FFO | 685 |  | 757 |  | 927 |
Deduct: |  |  |
Sustaining capital(2) | (157) |  | (141) |  | (150) |
Productivity capital | (4) |  | (9) |  | (21) |
Dividends paid on preferred shares | (39) |  | (40) |  | (40) |
Distributions paid to subsidiaries’ non-controlling interests | (102) |  | (111) |  | (169) |
Principal payments on lease liabilities(2) | (25) |  | (21) |  | (18) |
Other | — |  | — |  | (5) |
FCF | 358 |  | 435 |  | 524 |

(1) 2019 and 2018 amounts include the PPA Termination Payments. See the Significant and Subsequent Events section for further details.
(2) Includes our share of amounts for Skookumchuck, an equity accounted joint venture.
TRANSALTA CORPORATION M31

Management’s Discussion and Analysis

Supplemental disclosure | 2020 | 2019 | 2018
FFO – excluding the PPA Termination Payments | 685 |  | 701 |  | 770 |
FCF – excluding the PPA Termination Payments | 358 |  | 379 |  | 367 |
FFO per share – excluding the PPA Termination Payments | 2.49 |  | 2.48 |  | 2.68 |
FCF per share – excluding the PPA Termination Payments | 1.30 |  | 1.34 |  | 1.28 |

For explanations for the current period, please refer to the Highlights section of this MD&A.
FCF in 2019, after adjusting for the PPA Termination Payments, increased $12 million compared to 2018, primarily as a result of lower sustaining and productivity capital expenditures and lower distributions paid to subsidiaries' non-controlling interests. Significant changes in segmented cash flows are highlighted in the Segmented Comparable Results section of this MD&A.
The table below bridges our reported EBITDA of our owned assets to our comparable EBITDA:

Year ended Dec. 31, 2020 | Reported | Adjustments(1) | Joint venture investment(2) | Comparable total
Revenues | 2,101 |  | 70 |  | 3 |  | 2,174 |
Fuel, carbon compliance and purchased power | 968 |  | (186) |  | — |  | 782 |
Gross margin | 1,133 |  | 256 |  | 3 |  | 1,392 |
Operations, maintenance and administration | 472 |  | — |  | — |  | 472 |
Asset impairment | 84 |  | (84) |  | — |  | — |
Taxes, other than income taxes | 33 |  | — |  | — |  | 33 |
Net other operating income (expense) | (11) |  | (29) |  | — |  | (40) |
Comparable EBITDA | 555 |  | 369 |  | 3 |  | 927 |

(1) Refer to the reconciliation of net earnings (loss) attributable to common shareholders to comparable EBITDA table above for details of all adjustments.
(2) Includes our share of amounts for Skookumchuck, an equity accounted joint venture.
TRANSALTA CORPORATION M32

Management’s Discussion and Analysis
Fourth Quarter
Consolidated Financial Highlights

Three months ended Dec. 31 | 2020 | 2019
Adjusted availability (%)(1) | 87.1 |  | 91.6 |
Production (GWh)(1) | 7,704 |  | 8,153 |
Revenues | 544 |  | 609 |
Fuel, carbon compliance and purchased power(3) | 327 |  | 286 |
Operations, maintenance and administration | 118 |  | 127 |
Net earnings (loss) attributable to common shareholders | (167) |  | 66 |
Cash flow from operating activities | 110 |  | 181 |
Comparable EBITDA(2),(3) | 234 |  | 243 |
FFO(2) | 161 |  | 189 |
FCF(2) | 52 |  | 121 |
Net earnings (loss) per share attributable to common shareholders, basic and diluted | (0.61) |  | 0.24 |
FFO per share(2) | 0.59 |  | 0.67 |
FCF per share(2) | 0.19 |  | 0.43 |
Dividends declared per common share(4) | 0.09 |  | 0.04 |
Dividends declared per preferred share(5) | 0.50 |  | 0.26 |

(1) Adjusted availability and production include all generating assets that we operate and finance leases and exclude hydro assets and equity investments.
(2) These items are not defined and have no standardized meaning under IFRS. Presenting these items from period to period provides management and investors with the ability to evaluate earnings trends more readily in comparison with prior periods’ results. Please refer to the Discussion of Consolidated Financial Results section of this MD&A for further discussion of these items, including, where applicable, reconciliations to measures calculated in accordance with IFRS. See also the Additional IFRS Measures and Non-IFRS Measures section of this MD&A.
(3) During the fourth quarter of 2020, we reclassified interest expense on the AESO transmission line loss from fuel costs to interest expense.
(4) Dividends declared vary year over year due to timing of dividend declarations.
(5) Weighted average of the Series A, B, C, E and G preferred share dividends declared. Dividends declared vary year over year due to timing of dividend declarations.
Financial Highlights
During the fourth quarter of 2020, the Corporation demonstrated strong performance at the Wind and Solar and North American Gas segments with the addition of new facilities,and higher wind resources, which was more than offset by the expected impact on EBITDA of the Sundance Unit 6 turnaround and conversion to gas outage at Alberta Thermal and high levels of volatility in the market impacting the Energy Marketing segment.
FCF in the fourth quarter of 2020 was $52 million compared to $121 million in the same period of 2019, mainly due to lower comparable EBITDA, higher interest expense, higher sustaining capital expenditures, increased distributions paid to subsidiary non-controlling interests and final settlement of lease payments at the Highvale mine. FFO was $161 million, which was $28 million lower than the fourth quarter of 2019, also mainly due to lower comparable EBITDA and higher interest expense relating to new debt issuances.
Net loss attributable to common shareholders in the fourth quarter of 2020 was $167 million compared to net earnings of $66 million in the same period of 2019, a decrease of $233 million. The net loss in 2020 was impacted by lower availability, which reduced revenues, the additional coal inventory writedowns of $15 million from an increased cost of coal and higher depreciation from the acceleration of the Highvale mine closure of $8 million, the onerous contract provision recognized on the coal contract for Sheerness for $29 million and higher interest expense associated with the TEC Offering and the second tranche of the Brookfield Investment, partially offset by lower asset impairments. The prior year also benefited from the gain on the termination of the Keephills 3 coal rights contract of $88 million and the gain on the sale of Genesee 3 of $77 million.
TRANSALTA CORPORATION M33

Management’s Discussion and Analysis
Segmented Cash Flow Generated by the Business and Operational Performance
Segmented cash flow generated by the business measures the net cash generated by each of our segments after sustaining and productivity capital expenditures, reclamation costs and provisions. It also excludes non-cash mark-to-market gains or losses. This is the cash flow available to pay our interest, and cash taxes, distributions to our non-controlling partners, dividends to our preferred shareholders, grow the business, pay down debt and return capital to our shareholders.
Segmented cash flow and operational performance for the business for the three months ended Dec. 31, 2020 and 2019 is as follows:

Three months ended Dec. 31 | 2020 | 2019
Segmented cash flow(1) |  |
Hydro | 11 |  | 13 |
Wind and Solar | 80 |  | 72 |
North American Gas(2) | 28 |  | 22 |
Australian Gas | 24 |  | 25 |
Alberta Thermal(3) | (10) |  | 37 |
Centralia(3) | 28 |  | 25 |
Generation segmented cash flow | 161 |  | 194 |
Energy Marketing | 15 |  | 31 |
Corporate(4) | (28) |  | (29) |
Total segmented cash flow | 148 |  | 196 |

(1) This is not defined and has no standardized meaning under IFRS. Presenting this item from period to period provides management and investors with the ability to evaluate earnings trends more readily in comparison with prior periods’ results. Please refer to the Discussion of Consolidated Financial Results section of this MD&A for further discussion of these items, including, where applicable, reconciliations to measures calculated in accordance with IFRS. See also the Additional IFRS Measures and Non-IFRS Measures section of this MD&A.
(2) This segment was previously known as the Canadian Gas segment but renamed with the acquisition of the US cogeneration facility in the second quarter of 2020
(3) The Canadian Coal segment was renamed Alberta Thermal and the US Coal segment was renamed Centralia in the third quarter of 2020.
(4) Includes gains and losses on the total return swap.
Availability for the three months ended Dec. 31, 2020, was lower than with the same period in 2019, mainly due to the Sundance Unit 6 planned turnaround and conversion to gas outage at Alberta Thermal in late 2020, which was partially offset by higher availability at Centralia due to lower unplanned outages and derates. Production was lower for the three months ended Dec. 31, 2020, compared to the same period in 2019, primarily due to lower availability and economic dispatch at Alberta Thermal, partially offset by higher wind resources at Wind and Solar.
Segmented cash flow generated by the business totalled $148 million in the fourth quarter, a decrease of $48 million compared with last year’s performance. The decrease in cash flow is largely due to lower availability resulting from planned outages and additional sustaining capital spend resulting from the Sundance Unit 6 turnaround and conversion to gas outages at Alberta Thermal and lower cash flows from Energy Marketing due to market volatility. This was partially offset by increased segmented cash flows at North American Gas with the addition of the Ada facility, lower capital expenditures and higher margins at our Sarnia facility. In addition, segmented cash flows at Wind and Solar increased as a result of the addition of the Skookumchuck wind facility and full year of operations for Big Level and Antrim.
TRANSALTA CORPORATION M34

Management’s Discussion and Analysis
Discussion of Consolidated Financial Results for the Fourth Quarter
Comparable EBITDA
A reconciliation of net earnings (loss) attributable to common shareholders to comparable EBITDA results is set out below:

Three months ended Dec. 31 | 2020 | 2019
Net earnings (loss) attributable to common shareholders | (167) |  | 66 |
Net earnings attributable to non-controlling interests | 5 |  | 27 |
Preferred share dividends | 19 |  | 10 |
Net earnings (loss) | (143) |  | 103 |
Adjustments to reconcile net income to comparable EBITDA |  |
Income tax expense | (25) |  | 40 |
Gain on sale of assets and other | (7) |  | (64) |
Foreign exchange (gain) loss | (2) |  | (3) |
Net interest expense | 63 |  | 18 |
Equity income | (1) |  | — |
Depreciation and amortization | 173 |  | 154 |
Comparable reclassifications |  |
Decrease in finance lease receivables | 6 |  | 5 |
Mine depreciation included in fuel cost | 58 |  | 31 |
Australian interest income | 1 |  | 1 |
Unrealized mark-to-market (gains) losses | 47 |  | (1) |
Adjustments to earnings to arrive at comparable EBITDA |  |
Inventory writedown | 15 |  | — |
Impact of Sheerness going off-coal(1) | 29 |  | — |
Asset impairment charge(2) | 17 |  | 47 |
Gain on termination of Keephills 3 coal rights contract | — |  | (88) |
Share of adjusted EBITDA from joint venture(3) | 3 |  | — |
Comparable EBITDA | 234 |  | 243 |

(1) During the fourth quarter of 2020, a decision was made to accelerate our plans to eliminate coal as a fuel source at the Sheerness facility by the end of 2021. As such, the existing coal supply contract has been classified as an onerous contract and the remaining expected contract payments have been accrued for in the current year.
(2) Asset impairment charges for the three months ended Dec. 31, 2020, primarily relates to the impairment on the Centralia land ($9 million) relating to Centralia land and asset impairments resulting from changes in discount rates for the decommissioning and restoration liabilities for our retired assets (2019 — $32 million increase for the decommissioning and restoration liability at the Centralia mine and $15 million for trucks held for sale and written down to net realizable value).
(3) Includes our share of amounts for Skookumchuck, an equity accounted joint venture.
A summary of our comparable EBITDA by segment for the three months ended Dec. 31, 2020 and 2019 is as follows:

Three months ended Dec. 31 | 2020 | 2019
Comparable EBITDA |  |
Hydro | 22 |  | 18 |
Wind and Solar | 77 |  | 80 |
North American Gas(1) | 32 |  | 29 |
Australian Gas | 31 |  | 28 |
Alberta Thermal(2) | 41 |  | 55 |
Centralia(2) | 30 |  | 29 |
Energy Marketing | 23 |  | 26 |
Corporate | (22) |  | (22) |
Total Comparable EBITDA | 234 |  | 243 |

(1) This segment was previously known as the Canadian Gas segment but renamed with the acquisition of the US cogeneration facility in the second quarter of 2020.
(2) The Canadian Coal segment was renamed Alberta Thermal and the US Coal segment was renamed Centralia in the third quarter of 2020.
TRANSALTA CORPORATION M35

Management’s Discussion and Analysis
Comparable EBITDA decreased by $9 million for the fourth quarter 2020, compared to 2019, primarily as a result of:
▪Hydro results were $4 million higher due to increased revenues from higher water resources and lower fuel and purchased power costs primarily resulting from allocated AESO transmission line loss recoveries.
▪Wind and Solar results were down $3 million mainly due to provisions for the AESO transmission line loss and insurance proceeds benefiting 2019, partially offset by higher production volumes and additional earnings from Skookumchuck.
▪Our North American Gas business was up $3 million mainly due to the addition of the new Ada facility and higher margins at our Sarnia facility.
▪Australian Gas was up $3 million, mainly due to lower legal costs.
▪Our Alberta Thermal results were down $14 million mainly due to lower production and increased fuel costs incurred from the acceleration of the Highvale mine closing and higher costs of coal.
▪Centralia results were consistent with the prior year's fourth quarter results as lower revenues were offset with decreases in fuel and purchased power costs and lower OM&A due to dispatch optimization.
▪Energy Marketing’s comparable EBITDA was down $3 million, mainly due to continued high levels of volatility in the market.
▪Corporate costs were consistent with the prior year's fourth quarter results. Impacts from the total return swap on our share-based payment plans were similar in 2020 compared to 2019.
Funds from Operations and Free Cash Flow
FFO per share and FCF per share are calculated as follows using the weighted average number of common shares outstanding during the period. FFO, FFO per share, FCF and FCF per share are non-IFRS measures, are not defined under IFRS, and therefore should not be considered in isolation or as an alternative to or to be more meaningful than cash flow from operating activities as determined in accordance with IFRS, when assessing our financial performance or liquidity. See the Additional IFRS Measures and Non-IFRS Measures section in this MD&A for further details.
The table below reconciles our cash flow from operating activities to our FFO and FCF for the three months ended Dec. 31, 2020 and 2019:

Three months ended Dec. 31 | 2020 | 2019
Cash flow from operating activities | 110 |  | 181 |
Change in non-cash operating working capital balances | 25 |  | 1 |
Cash flow from operations before changes in working capital | 135 |  | 182 |
Adjustments |  |
Share of adjusted FFO from joint venture(1) | 3 |  | — |
Decrease in finance lease receivable | 6 |  | 5 |
Coal inventory writedown | 15 |  | — |
Other | 2 |  | 2 |
FFO | 161 |  | 189 |
Deduct: |  |
Sustaining capital(1) | (58) |  | (30) |
Productivity capital | (3) |  | (2) |
Dividends paid on preferred shares | (9) |  | (10) |
Distributions paid to subsidiaries’ non-controlling interests | (29) |  | (22) |
Principal payments on lease liabilities(1) | (10) |  | (5) |
Other | — |  | 1 |
FCF | 52 |  | 121 |
Weighted average number of common shares outstanding in the period | 273 |  | 280 |
FFO per share | 0.59 |  | 0.67 |
FCF per share | 0.19 |  | 0.43 |

(1) Includes our share of amounts for Skookumchuck, an equity accounted joint venture.
TRANSALTA CORPORATION M36

Management’s Discussion and Analysis
The table below provides a reconciliation of our comparable EBITDA to our FFO and FCF for the three months ended Dec. 31, 2020 and 2019:

Three months ended Dec. 31 | 2020 | 2019
Comparable EBITDA | 234 |  | 243 |
Provisions | (10) |  | (1) |
Interest expense(1) | (56) |  | (41) |
Current income tax expense(1) | 5 |  | (7) |
Realized foreign exchange gain (loss) | (1) |  | 1 |
Decommissioning and restoration costs settled(1) | (5) |  | (10) |
Other non-cash items | (6) |  | 4 |
FFO | 161 |  | 189 |
Deduct: |  |
Sustaining capital(1) | (58) |  | (30) |
Productivity capital | (3) |  | (2) |
Dividends paid on preferred shares | (9) |  | (10) |
Distributions paid to subsidiaries’ non-controlling interests | (29) |  | (22) |
Principal payments on lease liabilities(1) | (10) |  | (5) |
Other | — |  | 1 |
Comparable FCF | 52 |  | 121 |
Weighted average number of common shares outstanding in the period | 273 |  | 280 |
Comparable FFO per share | 0.59 |  | 0.67 |
Comparable FCF per share | 0.19 |  | 0.43 |

(1) Includes our share of amounts for Skookumchuck, an equity accounted joint venture.
The table below bridges our reported EBITDA of our owned assets to our comparable EBITDA:

Year ended Dec. 31, 2020 | Reported | Adjustments(1) | Joint venture investment(2) | Comparable total
Revenues | 544 |  | 56 |  | 3 |  | 603 |
Fuel, carbon compliance and purchased power | 327 |  | (74) |  | — |  | 253 |
Gross Margin | 217 |  | 130 |  | 3 |  | 350 |
Operations, maintenance and administration | 118 |  | — |  | — |  | 118 |
Asset impairment | 17 |  | (17) |  | — |  | — |
Taxes, other than income taxes | 8 |  | — |  | — |  | 8 |
Net other operating income (expense) | 19 |  | (29) |  | — |  | (10) |
Comparable EBITDA | 55 |  | 176 |  | 3 |  | 234 |

(1) Please refer to the reconciliation of net earnings (loss) attributable to common shareholders to comparable EBITDA table above for details of all adjustments.
(2) Includes our share of amounts for Skookumchuck, an equity accounted joint venture.
TRANSALTA CORPORATION M37

Management’s Discussion and Analysis
Selected Quarterly Information
Our results are seasonal due to the nature of the electricity market and related fuel costs. Higher maintenance costs are often incurred in the spring and fall when electricity prices are expected to be lower, as electricity prices generally increase in the peak winter and summer months in our main markets due to increased heating and cooling loads. Margins are also typically impacted in the second quarter due to the volume of hydro production resulting from spring runoff and rainfall in the Pacific Northwest, which impacts production at Centralia. Typically, hydroelectric facilities generate most of their electricity and revenues during the spring months when melting snow starts feeding watersheds and rivers. Inversely, wind speeds are historically greater during the cold winter months and lower in the warm summer months.

| Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020
Revenues | 606 |  | 437 |  | 514 |  | 544 |
Comparable EBITDA | 220 |  | 217 |  | 256 |  | 234 |
FFO | 172 |  | 159 |  | 193 |  | 161 |
Net earnings (loss) attributable to common shareholders | 27 |  | (60) |  | (136) |  | (167) |
Net earnings (loss) per share attributable to common shareholders, basic and diluted(1) | 0.10 |  | (0.22) |  | (0.50) |  | (0.61) |
| Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019
Revenues | 648 |  | 497 |  | 593 |  | 609 |
Comparable EBITDA | 221 |  | 215 |  | 305 |  | 243 |
FFO | 169 |  | 155 |  | 244 |  | 189 |
Net earnings (loss) attributable to common shareholders | (65) |  | — |  | 51 |  | 66 |
Net earnings (loss) per share attributable to common shareholders, basic and diluted(1) | (0.23) |  | — |  | 0.18 |  | 0.24 |

(1) Basic and diluted earnings per share attributable to common shareholders and comparable earnings per share are calculated each period using the weighted average common shares outstanding during the period. As a result, the sum of the earnings per share for the four quarters making up the calendar year may sometimes differ from the annual earnings per share.
Reported net earnings, comparable EBITDA and FFO are generally higher in the first and fourth quarters due to higher demand associated with the cold winter months in the markets in which we operate and lower planned outages.
Net earnings (loss) attributable to common shareholders has also been impacted by the following variations and events:
▪Revenues declined due to weaker market conditions in 2020 as a result of COVID-19 and low oil prices;
▪Impact of Sheerness going off-coal, which has resulted in the remaining coal supply payments on the existing coal supply agreement being recognized as an onerous contract in the fourth quarter of 2020;
▪Coal inventory writedowns in the third and fourth quarters of 2020;
▪Impact of the updated provision estimates for the AESO transmission line loss during the last three quarters of 2020;
▪Significant foreign exchange gains in the last three quarters of 2020 more than offset foreign exchange losses experienced during the first quarter of 2020, while 2019 experienced overall foreign exchange losses for the year;
▪Gains relating to the Keephills 3 and Genesee 3 swap in the fourth quarter of 2019;
▪Effects of impairments and reversals during the second, third and fourth quarters of 2020 and the third and fourth quarters of 2019;
▪Effects of changes in decommissioning and restoration provision in the third quarter of 2020 and third quarter of 2019;
▪Effects of changes in useful lives of certain assets during the third quarter of 2020 and third quarter of 2019;
▪Change in income tax rates in Alberta in the second quarter of 2019;
▪Lower scheduled payments commencing in January 2019 from the Poplar Creek finance lease; and
▪Recognition of $56 million received on winning the arbitration against the Balancing Pool in the third quarter of 2019.
TRANSALTA CORPORATION M38

Management’s Discussion and Analysis
Key Financial Ratios
The methodologies and ratios used by rating agencies to assess our credit rating are not publicly disclosed. We have developed our own definitions of ratios and targets to help evaluate the strength of our financial position. These metrics and ratios are not defined and have no standardized meaning under IFRS and may not be comparable to those used by other entities or by rating agencies. We maintained a strong and flexible financial position in 2020.
Funds from Operations before Interest to Adjusted Interest Coverage

For the year ended Dec. 31 | 2020 | 2019 | 2018
FFO(1) | 685 |  | 757 |  | 927 |
Less: PPA Termination Payments | — |  | (56) |  | (157) |
Add: Interest on debt, exchangeable debentures and leases, net of interest income and capitalized interest(2) | 182 |  | 166 |  | 174 |
FFO before interest | 867 |  | 867 |  | 944 |
Interest on debt, exchangeable securities and leases, net of interest income(2)(3) | 185 |  | 172 |  | 176 |
Add: 50 per cent of dividends paid on preferred shares(3) | 22 |  | 20 |  | 20 |
Adjusted interest | 207 |  | 192 |  | 196 |
FFO before interest to adjusted interest coverage (times) | 4.2 |  | 4.5 |  | 4.8 |

(1) See the Discussion of Consolidated Financial Results section in this MD&A for reconciliation of cash flow from operating activities to FFO. See also the IFRS Measures and Non-IFRS Measures section for further details.
(2) The interest on tax equity financing for Skookumchuck, an equity accounted joint venture, is not represented in the amounts.
(3) Exchangeable preferred shares are considered equity with dividend payments for credit purposes. For accounting purposes, they are accounted for as debt with interest expense in the Consolidated Financial Statements.
Our target for FFO before interest to adjusted interest coverage is four to five times. While all periods are within our target range, the ratio decreased in 2020 compared to 2019, mainly due to lower FFO before interest.
Adjusted FFO to Adjusted Net Debt

As at Dec. 31 | 2020 | 2019 | 2018
FFO(1)(2) | 685 |  | 757 |  | 927 |
Less: PPA Termination Payments(1) | — |  | (56) |  | (157) |
Add: 100 per cent of interest paid on exchangeable preferred shares (3) | 5 |  | — |  | — |
Less: 50 per cent of dividends paid on preferred shares(1)(3) | (22) |  | (20) |  | (20) |
Adjusted FFO(1) | 668 |  | 681 |  | 750 |
Period-end long-term debt(4) | 3,361 |  | 3,212 |  | 3,267 |
Exchangeable securities | 730 |  | 326 |  | — |
Less: 100 per cent of exchangeable preferred shares(3) | (400) |  | — |  | — |
Less: Cash and cash equivalents | (703) |  | (411) |  | (89) |
Less: Principal portion of TransAlta OCP restricted cash | (11) |  | (10) |  | (27) |
Add: 50 per cent of issued preferred shares and exchangeable preferred shares(3) | 671 |  | 471 |  | 471 |
Fair value asset of hedging instruments on debt(5) | (2) |  | (7) |  | (10) |
Adjusted net debt(6) | 3,646 |  | 3,581 |  | 3,612 |
Adjusted FFO to adjusted net debt (%) | 18.3 |  | 19.0 | 20.8 |

(1) Last 12 months.
(2) Refer to the Discussion of Consolidated Financial Results section of this MD&A for the reconciliation of cash flow from operating activities to FFO. See also the IFRS Measures and Non-IFRS Measures section for further details.
(3) Exchangeable preferred shares are considered equity with dividend payments for credit purposes. For accounting purposes, they are accounted for as debt with interest expense in the Consolidated Financial Statements.
(4) Includes lease liabilities and tax equity financing.
(5) Included in risk management assets and/or liabilities on the consolidated financial statements as at Dec. 31, 2020, Dec. 31, 2019, and Dec. 31, 2018.
(6) The tax equity financing for Skookumchuck, an equity accounted joint venture, is not represented in the amounts.
Our target range for adjusted FFO to adjusted net debt is 20 to 25 per cent. Our adjusted FFO to adjusted net debt declined due to lower adjusted FFO compared with 2019, partially due to higher adjusted net debt. We reached the low end of our target range of 20 to 25 per cent in 2018.
TRANSALTA CORPORATION M39

Management’s Discussion and Analysis
Adjusted Net Debt to Adjusted Comparable EBITDA

As at Dec. 31 | 2020 | 2019 | 2018
Period-end long-term debt(1) | 3,361 |  | 3,212 |  | 3,267 |
Exchangeable securities | 730 |  | 326 |  | — |
Less: 100 per cent of exchangeable preferred shares(2) | (400) |  | — |  | — |
Less: Cash and cash equivalents | (703) |  | (411) |  | (89) |
Less: Principal portion of TransAlta OCP restricted cash | (11) |  | (10) |  | (27) |
Add: 50 per cent of issued preferred shares and exchangeable preferred shares(2) | 671 |  | 471 |  | 471 |
Fair value asset of hedging instruments on debt(3) | (2) |  | (7) |  | (10) |
Adjusted net debt(4) | 3,646 |  | 3,581 |  | 3,612 |
Comparable EBITDA(5) | 927 |  | 984 |  | 1,161 |
Less: PPA Termination Payments(5) | — |  | (56) |  | (157) |
Adjusted comparable EBITDA(5) | 927 |  | 928 |  | 1,004 |
Adjusted net debt to adjusted comparable EBITDA (times) | 3.9 |  | 3.9 |  | 3.6 |

(1) Includes lease liabilities and tax equity financing.
(2) Exchangeable preferred shares are considered equity with dividend payments for credit purposes. For accounting purposes, they are accounted for as debt with interest expense in the Consolidated Financial Statements.
(3) Included in risk management assets and/or liabilities on the consolidated financial statements as at Dec. 31, 2020, Dec. 31, 2019, and Dec. 31, 2018.
(4) The tax equity financing for Skookumchuck, an equity accounted joint venture, is not represented in the amounts.
(5) Last 12 months.
Our target for adjusted net debt to comparable EBITDA is 3.0 to 3.5 times. Our adjusted net debt to comparable EBITDA ratio was consistent to 2019, as adjusted net debt only increased slightly during the year.
TRANSALTA CORPORATION M40

Management’s Discussion and Analysis
Deconsolidated Net Debt to Deconsolidated Comparable EBITDA
In addition to reviewing fully consolidated ratios and results, management reviews net debt to comparable EBITDA on a deconsolidated basis to highlight TransAlta's financial flexibility, balance sheet strength and leverage, excluding the portion of TransAlta Renewables and TransAlta Cogeneration L.P. ("TA Cogen") that are not owned by TransAlta. These metrics and ratios are not defined under IFRS, and may not be comparable to those used by other entities or by rating agencies. See also the IFRS Measures and Non-IFRS Measures section of this MD&A for further details.

As at Dec. 31 | 2020 | 2019 | 2018
Period-end long-term debt(1) | 3,361 |  | 3,212 |  | 3,267 |
Exchangeable securities | 730 |  | 326 |  | — |
Less: 100 per cent of exchangeable preferred shares(2) | (400) |  | — |  | — |
Less: Cash and cash equivalents | (703) |  | (411) |  | (89) |
Add: TransAlta Renewables cash and cash equivalents(3) | 582 |  | 63 |  | 73 |
Less: Principal portion of TransAlta OCP restricted cash | (11) |  | (10) |  | (27) |
Add: 50 per cent of issued preferred shares(2) | 671 |  | 471 |  | 471 |
Fair value asset of hedging instruments on debt(4) | (2) |  | (7) |  | (10) |
Less: TransAlta Renewables long-term debt | (692) |  | (961) |  | (932) |
Less: US tax equity financing and South Hedland debt(5) | (905) |  | (145) |  | (28) |
Deconsolidated net debt | 2,631 |  | 2,538 |  | 2,725 |
Comparable EBITDA(6)(7) | 927 |  | 984 |  | 1,161 |
Less: PPA Termination Payments(6) | — |  | (56) |  | (157) |
Less: TransAlta Renewables comparable EBITDA(6) | (462) |  | (438) |  | (430) |
Less: TA Cogen comparable EBITDA(6) | (54) |  | (80) |  | (181) |
Less: comparable EBITDA from equity accounted investments(8) | (3) |  | — |  | — |
Add: Dividends from TransAlta Renewables(6) | 151 |  | 151 |  | 151 |
Add: Dividends from TA Cogen(6) | 17 |  | 37 |  | 86 |
Deconsolidated comparable EBITDA(6)(7) | 576 |  | 598 |  | 630 |
Deconsolidated net debt to deconsolidated comparable EBITDA(6)(7) (times) | 4.6 |  | 4.2 |  | 4.3 |

(1) Includes lease liabilities and tax equity financing.
(2) Exchangeable preferred shares are considered equity with dividend payments for credit purposes. For accounting purposes, they are accounted for as debt with interest expense in the Consolidated Financial Statements.
(3) In the second quarter of 2020, we adjusted the calculation to remove the portion of cash relating to TransAlta Renewables' cash and cash equivalents to reflect deconsolidated cash. Prior periods have also been updated.
(4) Included in risk management assets and/or liabilities on the consolidated financial statements as at Dec. 31, 2020, Dec. 31, 2019, and Dec. 31, 2018.
(5) Relates to assets where TransAlta Renewables has economic interests.
(6) Last 12 months.
(7) During the fourth quarter of 2020, we revised comparable EBITDA to exclude the interest on the AESO transmission line loss.
(8) Represents our share of amounts for Skookumchuck, an equity accounted joint venture.
Our target for deconsolidated net debt to deconsolidated comparable EBITDA is 2.5 to 3.0 times. Our deconsolidated net debt to deconsolidated comparable EBITDA ratio increased compared with 2019, as higher deconsolidated net debt was partially offset by higher deconsolidated comparable EBITDA.
TRANSALTA CORPORATION M41

Management’s Discussion and Analysis
Deconsolidated Comparable EBITDA by Segment
Comparable EBITDA is a key metric for TransAlta and TransAlta Renewables and provides management and shareholders a representation of core business profitability. Deconsolidated EBITDA is used in key planning and credit metrics and segment results highlight the operating performance of assets held directly at TransAlta that are comparable from period to period.
A reconciliation of comparable EBITDA to deconsolidated comparable EBITDA by segment results is set out below:

| 2020 | 2019 | 2018
| TransAlta Consolidated | TransAlta Renewables | TransAlta Deconsolidated | TransAlta Consolidated | TransAlta Renewables | TransAlta Deconsolidated | TransAlta Consolidated | TransAlta Renewables | TransAlta Deconsolidated
Hydro | 105 |  | 21 |  |  | 110 |  | 18 |  |  | 109 | 17 |  |
Wind and Solar | 248 |  | 256 |  |  | 231 |  | 238 |  |  | 233 | 218 |  |
North American Gas | 117 |  | 80 |  |  | 120 |  | 82 |  |  | 259 | 84 |  |
Australian Gas | 124 |  | 125 |  |  | 118 |  | 120 |  |  | 124 | 130 |  |
Alberta Thermal | 162 |  | — |  |  | 319 |  | — |  |  | 389 | — |  |
Centralia | 139 |  | — |  |  | 73 |  | — |  |  | 91 | — |  |
Energy Marketing | 113 |  | — |  |  | 89 |  | — |  |  | 43 | — |  |
Corporate | (81) |  | (20) |  |  | (76) |  | (20) |  |  | (87) |  | (19) |  |
Comparable EBITDA(1)(2) | 927 |  | 462 |  | 465 |  | 984 |  | 438 |  | 546 |  | 1,161 |  | 430 |  | 731 |
Less: TA Cogen comparable EBITDA |  |  | (54) |  |  |  | (80) |  |  |  | (181) |
Less: Termination of Sundance B and C PPAs(1) |  |  | — |  |  |  | (56) |  |  |  | (157) |
Less: EBITDA from joint venture investments(3) |  |  | (3) |  |  |  | — |  |  |  | — |
Add: Dividend from TransAlta Renewables((1) |  |  | 151 |  |  |  | 151 |  |  |  | 151 |
Add: Dividend from TA Cogen(1) |  |  | 17 |  |  |  | 37 |  |  |  | 86 |
Deconsolidated TransAlta comparable EBITDA |  |  | 576 |  |  |  | 598 |  |  |  | 630 |

(1) Last 12 months.
(2) During the fourth quarter of 2020, we revised comparable EBITDA to exclude the interest on the AESO transmission line loss.
(3) Represents our share of amounts for Skookumchuck, an equity accounted joint venture.
TRANSALTA CORPORATION M42

Management’s Discussion and Analysis
Deconsolidated FFO
The Corporation has set a target to return 10 to 15 per cent of TransAlta's deconsolidated FFO to shareholders as it aligns shareholder returns to the assets held directly at TransAlta. This metric is not defined and has no standardized meaning under IFRS, and may not be comparable to those used by other entities or by rating agencies. See also the IFRS Measures and Non-IFRS Measures section of this MD&A for further details. Deconsolidated FFO for the years ended Dec. 31 is detailed below:

| 2020 | 2019 | 2018
| TransAlta Consolidated | TransAlta Renewables | TransAlta Deconsolidated | TransAlta Consolidated | TransAlta Renewables | TransAlta Deconsolidated | TransAlta Consolidated | TransAlta Renewables | TransAlta Deconsolidated
Cash flow from operating activities | 702 |  | 267 |  |  | 849 |  | 331 |  |  | 820 |  | 385 |  |
Change in non-cash operating working capital balances | (89) |  | 31 |  |  | (121) |  | (23) |  |  | 44 |  | 5 |  |
Cash flow from operations before changes in working capital | 613 |  | 298 |  |  | 728 |  | 308 |  |  | 864 |  | 390 |  |
Adjustments: |  |  |  |  |  |  |  |  |
Decrease in finance lease receivable | 17 |  | — |  |  | 24 |  | — |  |  | 59 |  | — |  |
Coal inventory writedown | 37 |  | — |  |  | — |  |  |  |  |  |
Share of FFO from joint venture(1) | 3 |  | — |  |  | — |  | — |  |  | — |  | — |  |
Finance and interest income - economic interests | — |  | (69) |  |  | — |  | (76) |  |  | — |  | (171) |  |
Adjusted FFO - economic interests | — |  | 148 |  |  | — |  | 146 |  |  | — |  | 162 |  |
Other | 15 |  | — |  |  | 5 |  | — |  |  | 4 |  | — |  |
FFO | 685 |  | 377 |  | 308 | 757 |  | 378 |  | 379 | 927 |  | 381 |  | 546
Dividend from TransAlta Renewables |  |  | 151 |  |  |  | 151 |  |  |  | 151 |
Distributions to TA Cogen's Partner |  |  | (17) |  |  |  | (37) |  |  |  | (86) |
Less: Share of adjusted FFO from joint venture(1) |  |  | (3) |  |  |  | — |  |  |  | — |
Less: PPA Termination Payments |  |  | — |  |  |  | (56) |  |  |  | (157) |
Deconsolidated TransAlta FFO |  |  | 439 |  |  |  | 437 |  |  |  | 454 |

(1) Represents our share of amounts for Skookumchuck, an equity accounted joint venture.
TRANSALTA CORPORATION M43

Management’s Discussion and Analysis
Financial Position
The following table highlights significant changes in the consolidated statements of financial position from Dec. 31, 2019, to Dec. 31, 2020:

|  |  | Increase
Assets | Dec. 31, 2020 | Dec. 31, 2019 | (decrease)
Cash and cash equivalents | 703 |  | 411 |  | 292 |
Restricted cash | 71 |  | 32 |  | 39 |
Trade and other receivables | 583 |  | 462 |  | 121 |
Risk management assets (current and long-term) | 692 |  | 806 |  | (114) |
Assets held for sale | 105 |  | — |  | 105 |
Investments | 100 |  | — |  | 100 |
Finance lease receivables (long-term) | 228 |  | 176 |  | 52 |
Property, plant and equipment, net | 5,822 |  | 6,207 |  | (385) |
Deferred income tax assets | 51 |  | 18 |  | 33 |
Others(1) | 1,392 |  | 1,396 |  | (4) |
Total assets | 9,747 |  | 9,508 |  | 239 |
Liabilities and equity |  |  |
Accounts payable and accrued liabilities | 599 |  | 413 |  | 186 |
Credit facilities, long-term debt and lease liabilities (current and long-term) | 3,361 |  | 3,212 |  | 149 |
Exchangeable securities | 730 |  | 326 |  | 404 |
Decommissioning and other provisions (current and long-term) | 673 |  | 546 |  | 127 |
Risk management liabilities (current and long-term) | 162 |  | 110 |  | 52 |
Deferred income tax liabilities | 396 |  | 472 |  | (76) |
Equity attributable to shareholders | 2,352 |  | 2,961 |  | (609) |
Others(2) | 1,474 |  | 1,468 |  | 6 |
Total liabilities and equity | 9,747 |  | 9,508 |  | 239 |

(1) Includes prepaid expenses, inventory, right-of-use assets, intangible assets, goodwill and other assets.
(2) Includes income taxes payable, dividends payable, contract liabilities, defined benefit obligation and other long-term liabilities and non-controlling interests.
TRANSALTA CORPORATION M44

Management’s Discussion and Analysis
Significant changes in TransAlta's consolidated statements of financial position were as follows:
▪See the cash flow section of this MD&A for details on the change in cash during the period.
▪Restricted cash increased by $45 million related to the TEC Notes, offset by a reduction in the Big Level and Antrim restricted cash balances.
▪Trade and other receivables increased largely due to timing of customer receipts, partially offset by lower collateral payments.
▪Risk management assets, net of liabilities, decreased primarily due to contract settlements and changes in market prices and foreign exchange rates.
▪Assets held for sale relate primarily to the future sale of the Pioneer Pipeline.
▪Investments increased due to the acquisition of Skookumchuck and EMG during the fourth quarter of 2020.
▪Finance lease receivables increased in the year with the execution of the BHP Nickle West contract extension.
▪PP&E decreased due to depreciation ($717 million), the reclass of pipeline and certain mining equipment to assets held for sale ($105 million), the reclass of the Southern Cross facility to finance lease receivables ($69 million) and asset impairments ($81 million). This was partially offset by additions ($486 million) relating to assets under construction for the conversion to gas, the Windrise wind facility, WindCharger battery storage project, the Kaybob cogeneration project, land and planned major maintenance expenditures. In addition, there were net revisions for increasing decommissioning provisions as a result of changes in cash flows and discount rates ($94 million).
▪Deferred income tax assets increased mainly due to lower earnings in Canada compared to the same period last year.
▪Accounts payable and accrued liabilities increased largely due to timing of payments for operational payables.
▪Credit facilities, long-term debt and lease liabilities increased due to TEC Notes issued in the fourth quarter 2020. This was partially offset by the repayment of $400 million of debentures, repayment of the credit facility ($106 million) and other scheduled principal payments ($86 million).
▪Exchangeable securities increased due to the $400 million invested by Brookfield on Oct. 30, 2020, in exchange for redeemable, retractable first preferred shares as part of the Brookfield Investment.
▪Decommissioning and other provisions have increased mainly due to revisions in estimated cash flows ($72 million), changes in discount rates ($36 million), liabilities incurred ($35 million) and accretion ($30 million), which was partially offset by liabilities settled ($37 million).
▪Equity attributable to shareholders decreased mainly due to net losses for the period ($287 million), common and preferred share dividend payments ($107 million), net losses on cash flow hedges ($91 million), fair value investments losses ($50 million), actuarial losses on defined benefit plans ($11 million) and the share repurchases under the NCIB ($61 million).
TRANSALTA CORPORATION M45

Management’s Discussion and Analysis
Cash Flows
The following chart highlights significant changes in the consolidated statements of cash flows for the years ended Dec. 31, 2020, Dec. 31, 2019, and Dec. 31, 2018:

Year ended Dec. 31 | 2020 | 2019 | Increase/ (decrease)
Cash and cash equivalents, beginning of year | 411 |  | 89 |  | 322 |
Provided by (used in): |  |  |
Operating activities | 702 |  | 849 |  | (147) |
Investing activities | (687) |  | (512) |  | (175) |
Financing activities | 272 |  | (14) |  | 286 |
Translation of foreign currency cash | 5 |  | (1) |  | 6 |
Cash and cash equivalents, end of year | 703 |  | 411 |  | 292 |
Year ended Dec. 31 | 2019 | 2018 | Increase/ (decrease)
Cash and cash equivalents, beginning of year | 89 |  | 314 |  | (225) |
Provided by (used in): |  |  |
Operating activities | 849 |  | 820 |  | 29 |
Investing activities | (512) |  | (394) |  | (118) |
Financing activities | (14) |  | (651) |  | 637 |
Translation of foreign currency cash | (1) |  | — |  | (1) |
Cash and cash equivalents, end of year | 411 |  | 89 |  | 322 |

Cash provided by operating activities for the year ended Dec. 31, 2020, was lower compared with 2019 primarily due to lower revenues in 2020.
Cash used in investing activities for the year ended Dec. 31, 2020, increased compared with 2019, largely due to:
▪Increase due to the investments in Skookumchuck and EMG ($102 million);
▪Changes in our restricted cash ($73 million), increased cash spent on construction activities ($69 million) and higher non-cash working capital related to the timing of construction payables for the assets under construction ($54 million); and
▪Offset by lower cash spent on acquisitions (TransAlta acquired Ada for $32 million in 2020, compared with the Kineticor acquisition of $87 million and the Pioneer Pipeline acquisition of $83 million in 2019).
Cash from financing activities for the year ended Dec. 31, 2020, increased compared with 2019, largely due to:
▪Issuance of long-term debt ($753 million) in 2020 and the exchangeable securities of $400 million; and
▪Higher debt repayments ($380 million) as a result of higher scheduled principal repayments on project debt ($393 million) offset by lower payments on the credit facilities ($13 million).
TRANSALTA CORPORATION M46

Management’s Discussion and Analysis
Financial Capital
The Corporation is focused on maintaining a strong balance sheet and financial position to ensure access to sufficient financial capital. Credit ratings provide information relating to the Corporation's financing costs, liquidity and operations and affect the Corporation's ability to obtain short-term and long-term financing and/or the cost of such financing. Maintaining a strong balance sheet also allows our commercial team to contract the Corporation’s portfolio with a variety of counterparties on terms and prices that are favourable to the Corporation’s financial results and provide TransAlta with better access to capital markets through commodity and credit cycles.
During 2020, Moody’s reaffirmed its issuer rating of Ba1 with a stable outlook; DBRS Limited reaffirmed the Corporation’s Unsecured Debt rating and Medium-Term Notes rating of BBB (low), the Preferred Shares rating of Pfd-3 (low) and Issuer Rating of BBB (low) with a stable outlook; and Standard and Poor’s reaffirmed the Corporation’s Unsecured Debt rating and Issuer Rating of BB+ with a stable outlook. Risks associated with our credit ratings are discussed in the Governance and Risk Management section of this MD&A.
TRANSALTA CORPORATION M47

Management’s Discussion and Analysis
Capital Structure
Our capital structure consists of the following components as shown below:

As at Dec. 31 | 2020 | 2019 | 2018
| $ | % | $ | % | $ | %
TransAlta Corporation |  |  |  |  |  |
Recourse debt - CAD debentures | 249 |  | 3 |  | 647 |  | 9 |  | 647 |  | 9 |
Recourse debt - US senior notes | 886 |  | 13 |  | 905 |  | 13 |  | 943 |  | 13 |
Exchangeable securities(1) | 730 |  | 11 |  | 326 |  | 5 |  | — |  | — |
Credit facilities | 114 |  | 2 |  | — |  | — |  | 174 |  | 2 |
Other | 7 |  | — |  | 9 |  | — |  | 11 |  | — |
Less: cash and cash equivalents | (121) |  | (2) |  | (348) |  | (5) |  | (16) |  | — |
Less: 50 per cent of exchangeable preferred shares(1) | (200) |  | (3) |  | — |  | — |  | — |  | — |
Less: principal portion of restricted cash on TransAlta OCP | (11) |  | — |  | (10) |  | — |  | (27) |  | — |
Less: fair value asset of economic hedging instruments on debt | (2) |  | — |  | (7) |  | — |  | (10) |  | — |
Net recourse debt, excluding US tax equity financing | 1,652 |  | 24 |  | 1,522 |  | 22 | 1,722 |  | 24 |
Non-recourse debt | 385 |  | 6 |  | 426 |  | 6 |  | 469 |  | 6 |
Lease liabilities | 112 |  | 2 |  | 119 |  | 2 |  | 63 |  | 1 |
US tax equity financing for TransAlta Renewables economic interests(2) | 134 |  | 2 |  | 145 |  | 2 |  | 28 |  | — |
Non-recourse debt for TransAlta Renewables economic interests(3) | 782 |  | 11 |  | — |  | — |  | — |  | — |
Total net debt - TransAlta Corporation | 3,065 |  | 45 |  | 2,212 |  | 32 |  | 2,282 |  | 31 |
TransAlta Renewables |  |  |  |  |  |
Credit facility | — |  | — |  | 220 |  | 3 |  | 165 |  | 2 |
Less: cash and cash equivalents | (582) |  | (9) |  | (63) |  | (1) |  | (73) |  | (1) |
Net recourse debt | (582) |  | (9) |  | 157 |  | 2 |  | 92 |  | 1 |
Non-recourse debt | 670 |  | 10 |  | 718 |  | 10 |  | 767 |  | 11 |
Lease liabilities | 22 |  | — |  | 23 |  | — |  | — |  | — |
Total net debt - TransAlta Renewables | 110 |  | 1 |  | 898 |  | 12 |  | 859 |  | 12 |
Total consolidated net debt(4) | 3,175 |  | 46 |  | 3,110 |  | 44 |  | 3,141 |  | 43 |
Non-controlling interests | 1,084 |  | 16 |  | 1,101 |  | 15 |  | 1,137 |  | 16 |
50 percent of exchangeable preferred securities(1) | 200 |  | 3 |  | — |  | — |  | — |  | — |
Equity attributable to shareholders |  |  |  |  |  |
Common shares | 2,896 |  | 43 |  | 2,978 |  | 42 |  | 3,059 |  | 42 |
Preferred shares | 942 |  | 14 |  | 942 |  | 13 |  | 942 |  | 13 |
Contributed surplus, deficit and accumulated other comprehensive income | (1,486) |  | (22) |  | (959) |  | (14) |  | (1,004) |  | (14) |
Total capital | 6,811 |  | 100 |  | 7,172 |  | 100 |  | 7,275 |  | 100 |

(1) Exchangeable preferred securities are considered equity with dividend payments for credit purposes. For accounting purposes, they are accounted for as debt with interest expense in the Consolidated Financial Statements.
(2) TransAlta Renewables has an economic interest in the entities holding these debts.
(3) TransAlta Renewables has an economic interest in the Australia entities, which includes the AU$800 million senior secured notes.
(4) The tax equity financing for Skookumchuck, an equity accounted joint venture, is not represented in these amounts.
We continued strengthening our financial position during 2020 and have sufficient liquidity to fund our growth strategy. We have enhanced shareholder value by:
2020
▪Obtaining AU$800 million in project financing related to our South Hedland facility;
▪On Oct. 30, 2020, we received the second tranche of $400 million from Brookfield in consideration for redeemable, retractable first preferred shares;
▪Redeeming our outstanding 5 per cent $400 million medium-term notes due on Nov. 25, 2020; and
▪Purchasing and cancelling 7,352,600 common shares at an average price of $8.33 per share through our NCIB program, for a total cost of $61 million.
TRANSALTA CORPORATION M48

Management’s Discussion and Analysis
2019
▪Obtaining US$126 million in tax equity financing to fund the Big Level and Antrim wind facilities;
▪Entering into a strategic investment with Brookfield whereby Brookfield agreed to invest $750 million in the Corporation. On May 1, 2019, we received the initial tranche of $350 million in exchange for seven per cent unsecured subordinated debentures due May 1, 2039, which are exchangeable by Brookfield into an equity ownership interest in our Alberta Hydro Assets in the future; and
▪Purchasing and cancelling 7,716,300 common shares at an average price of $8.80 per share through our NCIB program, for a total cost of $68 million.
2018
▪Early redeeming our outstanding 6.65 per cent US$500 million senior notes due May 15, 2018, for approximately $617 million (US$516 million) using proceeds from the Sundance B and C PPAs termination payment and existing liquidity;
▪Early redeeming our outstanding 6.40 per cent $400 million debentures due Nov. 2019, for approximately $425 million;
▪Paying out the US$25 million non-recourse debt related to the Mass Solar projects, and
▪Purchasing and cancelling 3,264,500 common shares at an average price of $7.02 per share through our NCIB program, for a total cost of $23 million.
Between 2021 and 2023, we have approximately $1 billion of debt maturing, comprised of approximately $631 million of recourse debt, with the balance mainly related to scheduled non-recourse debt repayments. We expect to refinance the senior notes maturing in 2022.
The Corporation's credit facilities are summarized in the table below:

As at Dec. 31, 2020 | Facility size | Utilized | Available capacity | Maturity date
Outstanding letters of credit(1) | Actual drawings
TransAlta Corporation |  |  |  |  |
Committed syndicated bank facility(2) | 1,250 |  | 379 |  | 114 |  | 757 |  | Q2 2023
Canadian committed bilateral credit facilities(3) | 240 |  | 150 |  | — |  | 90 |  | Q2 2021 & 2022
TransAlta Renewables |  |  |  |  |
Committed credit facility(2) | 700 |  | 92 |  | — |  | 608 |  | Q2 2023
Total | 2,190 |  | 621 |  | 114 |  | 1,455 |  |

(1) TransAlta has obligations to issue letters of credit and cash collateral to secure potential liabilities to certain parties, including those related to potential environmental obligations, commodity risk management and hedging activities, pension plan obligations, construction projects and purchase obligations. At Dec. 31, 2020, we provided cash collateral of $49 million.
(2) TransAlta has letters of credit of $89 million and TransAlta Renewables has letters of credit of $92 million issued from uncommitted demand facilities; these obligations are backstopped and reduce the available capacity on the committed credit facilities.
(3) One of the bilateral $80 million credit facilities has a maturity date of Q2 2021.
The weakening of the US dollar has decreased our long-term debt balances by $24 million as at Dec. 31, 2020. Almost all our US-denominated debt is hedged either through financial contracts or net investments in our US operations. During the period, these changes in our US-denominated debt were offset as follows:

As at Dec. 31 | 2020 | 2019
Effects of foreign exchange on carrying amounts of US operations (net investment hedge) and finance lease receivable | (11) |  | (21) |
Foreign currency cash flow hedges on debt | (5) |  | (9) |
Economic hedges and other | (5) |  | (9) |
Unhedged | (3) |  | (3) |
Total | (24) |  | (42) |

TRANSALTA CORPORATION M49

Management’s Discussion and Analysis
The Melancthon Wolfe Wind, Pingston, TAPC Holdings LP, New Richmond, Kent Hills Wind LP, TEC and TransAlta OCP non-recourse bonds with a carrying value of $1.8 billion (Dec. 31, 2019 - $1.1 billion) are subject to customary financing conditions and covenants that may restrict the Corporation’s ability to access funds generated by the facilities’ operations. Upon meeting certain distribution tests, typically performed once per quarter, the funds are able to be distributed by the subsidiary entities to their respective parent entity. These conditions include meeting a debt service coverage ratio prior to distribution, which was met by these entities in the third quarter of 2020. However, funds in these entities that have accumulated since the third quarter test will remain there until the next debt service coverage ratio can be calculated in the first quarter of 2021. At Dec. 31, 2020, $73 million (Dec. 31, 2019 - $42 million) of cash was subject to these financial restrictions.
Additionally, certain non-recourse bonds require that certain reserve accounts be established and funded through cash held on deposit and/or by providing letters of credit.
Proceeds received from the TEC Notes in the amount of AU$7 million are not able to be accessed by other Corporate entities as the funds must be solely used by the project entities for the purpose of paying major maintenance costs.
Working Capital
Including the current portion of long-term debt and lease liabilities, the excess of current assets over current liabilities was $967 million as at Dec. 31, 2020 (2019 - $224 million). Our working capital increased year over year mainly due to repayment of the $400 million debenture in 2020. Excluding the current portion of long-term debt and lease liabilities of $105 million, the excess of current assets over liabilities was $1.1 billion as at Dec. 31, 2020 (2019 - $737 million), an increase of $335 million, mainly due to higher cash and cash equivalents. For further details on changes in cash during the year, please refer to the Cash Flows section of this MD&A.
Share Capital
On March 1, 2021, the Corporation announced that it does not intend to exercise its right to redeem all or any part of the currently outstanding Series A Cumulative Fixed Redeemable Rate Reset Preferred Shares ("Series A Shares") and Series B Cumulative Redeemable Floating Rate Preferred Shares ("Series B Shares"). The Corporation has provided a notice to the registered shareholders of Series A Shares of the conversion right, on a one-for-one basis, into Series B Shares, and vice versa, providing Series B shareholders the right to exchange Series B Shares, on a one-for-one basis, into Series A Shares. Series A shareholders may elect to retain any or all of their current share holdings and continue to receive a fixed rate quarterly dividend. Series B shareholder may also elect to retain any or all of their current share holdings and continue to receive a floating rate quarterly dividend. After exercising conversion rights, if the balance that remains for either Series A Shares or Series B Shares is less than 1 million, that remaining balance will automatically convert to the other Series. Shareholders' notice of intention to convert must be received by the transfer agent no later than March 16, 2021 and the conversion date will be effective March 31, 2021. The annual dividend rate for the Series A Shares for the five-year period from and including March 31, 2021, to, but excluding, March 31, 2026, will be 2.877 per cent, which is equal to the five-year Government of Canada Bond yield of 0.847 per cent, determined as of March 1, 2021, plus 2.03 per cent. The annual dividend rate for the Series B Shares for the three month floating rate period from and including March 31, 2021, to, but excluding, June 30, 2021, will be 2.103 per cent based on the most recent auction of 90-day Government of Canada Treasury Bills of 0.073 per cent plus 2.03 per cent. The Floating Quarterly Dividend Rate will be reset every quarter.
Our Series C and Series E Cumulative Redeemable Rate Reset Preferred Shares failed to receive the required number of minimum votes in 2017 to give effect to conversions into Series D and Series F, respectively; accordingly, both the Series C and Series E Preferred Shares will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board. The Series G Cumulative Redeemable Rate Reset Preferred Shares also failed to receive the required number of minimum votes in 2019 to give effect to conversions into Series H. Therefore, the Series G Preferred Shares will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board.
TRANSALTA CORPORATION M50

Management’s Discussion and Analysis
The following tables outline the common and preferred shares issued and outstanding:

As at | March 2, 2021 | Dec. 31, 2020 | Dec. 31, 2019
| Number of shares (millions)
Common shares issued and outstanding, end of period | 269.9 | 269.8 |  | 277.0 |
Preferred shares |  |  |
Series A | 10.2 |  | 10.2 |  | 10.2 |
Series B | 1.8 |  | 1.8 |  | 1.8 |
Series C | 11.0 |  | 11.0 |  | 11.0 |
Series E | 9.0 |  | 9.0 |  | 9.0 |
Series G | 6.6 |  | 6.6 |  | 6.6 |
Preferred shares issued and outstanding in equity, end of period | 38.6 |  | 38.6 |  | 38.6 |
Series I - Exchangeable Securities(1) | 0.4 |  | 0.4 |  | — |
Preferred shares issued and outstanding, end of period | 39.0 |  | 39.0 |  | 38.6 |

(1) Brookfield invested $400 million in consideration for redeemable, retractable, first preferred shares. For accounting purposes, these preferred share are considered debt and disclosed as such in the consolidated financial statements.
Non-Controlling Interests
As of Dec. 31, 2020, we own 60.1 per cent (2019 - 60.4 per cent) of TransAlta Renewables. In 2020, our ownership percent decreased due to TransAlta Renewables issuing approximately 1 million common shares under their Dividend Reinvestment Plan ("DRIP"). We did not participate in this plan.
In the fourth quarter of 2020, TransAlta Renewables suspended the DRIP in respect of any future declared dividends. The dividend paid on Oct. 30, 2020, to shareholders of record on Oct. 15, 2020, was the last dividend payment eligible for reinvestment by participating shareholders. Subsequent dividends will be paid only in cash.
TransAlta Renewables is a publicly traded company whose common shares are listed on the TSX under the symbol “RNW.” TransAlta Renewables holds a diversified, highly contracted portfolio of assets with comparatively lower carbon intensity.
We also own 50.01 per cent of TA Cogen, which owns, operates or has an interest in three natural-gas-fired facilities (Ottawa, Windsor and Fort Saskatchewan) and one dual-fuel generating facility. Since we own a controlling interest in TA Cogen and TransAlta Renewables, we consolidate the entire earnings, assets and liabilities in relation to those assets.
Reported earnings attributable to non-controlling interests for the year ended Dec. 31, 2020, decreased by $60 million to $34 million compared to 2019. Earnings were down at TransAlta Renewables in 2020 mainly due to lower finance income and change in the fair value of financial assets an increase in income tax expense, offset by higher operating income and an increase in foreign exchange gains resulting from the strengthening of the Australian dollar relative to the Canadian dollar. Earnings from TA Cogen were lower in 2020 mainly due to lower operating income as a result of the planned outage for the dual-fuel conversion at Sheerness Unit 2, low Alberta market demand and the onerous contract provision for the coal supply agreement (see Note 9 of the consolidated financial statements for further details).
Reported earnings attributable to non-controlling interests for the year ended Dec. 31, 2019, decreased by $14 million to $94 million compared to 2018. Earnings were down at TransAlta Renewables in 2019 mainly due to lower finance and interest income from subsidiaries of TransAlta, foreign exchange losses due to the weakening of the Australian dollar and higher depreciation expense, partially offset by an increase in the fair value of investments in subsidiaries of TransAlta. Earnings from TA Cogen were higher in 2019 mainly due to strong Alberta pricing and lower costs of fuel at the coal-fired generating facility. The coal-fired generating facility was converted to dual-fuel in 2020.
TRANSALTA CORPORATION M51

Management’s Discussion and Analysis
Returns to Providers of Capital
Net Interest Expense
The components of net interest expense are shown below:

Year ended Dec. 31 | 2020 | 2019 | 2018
Interest on debt | 158 |  | 161 |  | 184 |
Interest on exchangeable securities | 34 |  | 20 |  | — |
Interest income | (10) |  | (13) |  | (11) |
Capitalized interest | (8) |  | (6) |  | (2) |
Loss on redemption of bonds | — |  | — |  | 24 |
Interest on lease liabilities | 8 |  | 4 |  | 3 |
Credit facility fees, bank charges and other interest | 18 |  | 15 |  | 13 |
Tax shield on tax equity financing(1) | 1 |  | (35) |  | — |
Interest on the line loss proceeding | 5 |  | — |  | — |
Other(2) | 2 |  | 10 |  | 15 |
Accretion of provisions | 30 |  | 23 |  | 24 |
Net interest expense | 238 |  | 179 |  | 250 |

(1) Relates to the tax benefit associated with bonus tax depreciation claimed in 2019 on the Big Level and Antrim wind projects that was assigned to the tax equity investor. The tax equity investment is treated as debt under IFRS and the monetization of the tax depreciation is considered a non-cash reduction of the debt balance and is reflected as a reduction in interest expense.
(2) In 2020, other interest expense included approximately nil (2019 — $5 million; 2018 — $7 million) for the significant financing component required under IFRS 15. In addition, in 2018, approximately $5 million of costs were expensed due to project-level financing that is no longer practicable.
Net interest expense was higher in 2020 primarily due to interest on the additional $400 million exchangeable preferred shares issued as part of the Brookfield Investment and the AU$800 million TEC Offering, both issued in October 2020. In addition, interest was higher due to interest charges received in 2020 for the AESO transmission line loss proceedings, and the 2019 impact of the $35 million tax credit received relating to the tax shield on Big Level and Antrim projects offset by the termination of the Keephills 3 contract liability in 2019, resulting in the deferred financing costs being recognized.
Net interest expense was lower in 2019 compared to 2018, primarily due to the $35 million credit related to the tax shield on the Big Level and Antrim projects and allocated to the tax equity investor. In addition, there were no prepayment premiums in 2019 as there were no early redemptions of bonds during the year, compared to 2018, which included $24 million in prepayment premiums.
Dividends to Shareholders
The declaration of dividends is at the discretion of the Board. The following are the common and preferred shares dividends declared each quarter during 2020 and the first quarter of 2021:

|  |  | Common | Preferred Series dividends per share
| Payable date | dividends |  |  |  |  |
Declaration date | Common shares | Preferred shares | per share | A | B | C | E | G
Jan. 16, 2020 | Apr 1, 2020 | Mar. 31, 2020 | 0.0425 |  | 0.16931 |  | 0.22949 |  | 0.25169 |  | 0.32463 |  | 0.31175 |
Apr. 20, 2020 | Jul 1, 2020 | Jun 30, 2020 | 0.0425 |  | 0.16931 |  | 0.22800 |  | 0.25169 |  | 0.32463 |  | 0.31175 |
Jul 22, 2020 | Oct.1, 2020 | Sept. 30, 2020 | 0.0425 |  | 0.16931 |  | 0.14359 |  | 0.25169 |  | 0.32463 |  | 0.31175 |
Nov. 3, 2020 | Jan. 1, 2021 | Dec. 31. 2020 | 0.0425 |  | 0.16931 | 0.13693 | 0.25169 | 0.32463 | 0.31175
Dec. 23, 2020 | Apr. 1, 2021 | Mar. 31, 2021 | 0.0450 |  | 0.16931 | 0.13186 | 0.25169 | 0.32463 | 0.31175

TRANSALTA CORPORATION M52

Management’s Discussion and Analysis
2021 Financial Outlook
The following table outlines our expectation on key financial targets and related assumptions for 2021 and should be read in conjunction with the narrative discussion that follows and the Governance and Risk Management section of this MD&A:

Measure | Target
Comparable EBITDA | $960 million - $1,080 million
FCF | $340 million - $440 million
Dividend | $0.18 per share annualized

Range of key power price assumptions |
Market | Power prices ($/MWh)
Alberta Spot | $58 - $68
Mid-C Spot (US$) | US$25 - US$35

Other assumptions relevant to the 2021 financial outlook
Sustaining capital | $175 million - $210 million

Operations
Market Pricing and Hedging Strategy
For 2021, power prices in Alberta are expected to be higher than 2020 with the expiry of the remaining PPAs at six thermal facilities that transferred dispatch control from the Balancing Pool to the asset owners, higher carbon compliance costs, and demand recovery relative to the economy-wide closures from COVID-19 during most of 2020; however, weather and demand are major factors in actual settled prices. Pacific Northwest power prices for 2021 are expected to be comparable to or higher than 2020, but will depend on the actual weather and hydrology of the year. Ontario power prices for 2021 are expected to be higher than 2020 prices if demand recovers from COVID-19 and normal weather is experienced in the province.
The objective of our portfolio management strategy in Alberta is to balance opportunity and risk, and to deliver optimization strategies that contribute to our total investment, which includes a return of and on invested capital. We can be more or less hedged in a given period, and we expect to realize our annual targets through a combination of forward hedging and selling generation into the spot market. The Alberta assets are managed as a portfolio to maximize the overall value of generation and capacity from our hydro, wind and energy storage and thermal facilities. Financial hedging is a key component of cash flow certainty and the hedges are tied to the portfolio of assets rather than a single facility.
Fuel Costs
For the Alberta thermal fleet, we expect the 2021 cash fuel costs per tonne of coal to be higher than 2020 as mine volumes are declining, resulting in slightly less mine cost efficiency. Coal volumes are declining as a result of increased gas consumption in the Alberta thermal fleet. This change in fuel mix will drive lower GHG emissions and the combined effect will result in lower total fuel and GHG costs for a given volume of power production.
In the Pacific Northwest of the US, the coal mine adjacent to our Centralia thermal facility is in the reclamation stage. Fuel at Centralia has been purchased primarily from external suppliers in the Powder River Basin and delivered by rail. In 2020, we amended our fuel and rail contract such that our rail freight costs fluctuate partly with power prices. The delivered fuel cost in 2021 is expected to be marginally higher than 2020 costs.
Most of the generation from gas turbine-based power facilities is sold under contracts with pass-through provisions for fuel. For gas generation with no pass-through provisions, we purchase natural gas from outside companies coincident with production, thereby minimizing our risk to changes in prices.
We closely monitor the risks associated with changes in electricity and input fuel prices on our future operations and, where we consider it appropriate, use various physical and financial instruments to hedge our assets and operations from such price risks.
TRANSALTA CORPORATION M53

Management’s Discussion and Analysis
Energy Marketing
EBITDA from our Energy Marketing segment is affected by prices and volatility in the market, overall strategies adopted and changes in regulation and legislation. We continuously monitor both the market and our exposure to maximize earnings while still maintaining an acceptable risk profile. Our 2021 objective for Energy Marketing is for the segment to contribute between $90 million to $110 million in gross margin for the year.
Exposure to Fluctuations in Foreign Currencies
Our strategy is to minimize the impact of fluctuations in the Canadian dollar against the US dollar and Australian dollar by offsetting foreign-denominated assets with foreign-denominated liabilities and by entering into foreign exchange contracts. We also have foreign-denominated expenses, including interest charges, which largely offset our net foreign-denominated revenues.
Net Interest Expense
Interest expense for 2021 is expected to be higher than in 2020 largely due to higher levels of debt. The increase in debt is mainly due to the AU$800 million TEC Offering and the $400 million exchangeable preferred shares issued as part of the Brookfield Investment, both occurring in October 2020. The increase in debt is offset by repayment of $400 million medium-term notes in November 2020. In addition, changes in interest rates on variable debt, and in the value of the Canadian dollar relative to the US and Australian dollars can affect the amount of interest expense incurred.
Liquidity and Capital Resources
We expect to maintain adequate available liquidity under our committed credit facilities. We currently have access to $2.1 billion in liquidity, including $703 million in cash. We expect to be well positioned to refinance the upcoming debt maturity in 2022. Please refer to the Corporate Strategy and Financial Capital sections of this MD&A for further details.
Sustaining and Productivity Capital Expenditures
Our estimate for total sustaining and productivity capital is allocated among the following:

Category | Description | Spent in 2019 | Spent in 2020 | Expected spend in 2021
Routine capital(1) | Capital required to maintain our existing generating capacity | 50 |  | 52 |  | 44 |  | - | 54
Planned major maintenance | Regularly scheduled major maintenance | 68 |  | 98 |  | 130 |  | - | 154
Mine capital | Capital related to mining equipment and land purchases | 23 |  | 7 |  | 1 |  | - | 2
Total sustaining capital(2) | 141 |  | 157 |  | 175 |  | - | 210
Insurance recoveries of sustaining capital expenditures | Insurance proceeds: 2019 relates to the tower fires at Wyoming Wind and Summerview | (10) |  | — |  | — |  | - | —
Total sustaining capital |  | 131 |  | 157 |  | 175 |  | - | 210
Productivity capital | Projects to improve power production efficiency and corporate improvement initiatives | 9 |  | 4 |  | 3 |  | - | 7
Total sustaining and productivity capital | 140 |  | 161 |  | 178 |  | - | 217

(1) Includes hydro life extension expenditures.
TRANSALTA CORPORATION M54

Management’s Discussion and Analysis
Significant planned major outages at TransAlta's operated units for 2021 include the following:
▪Major maintenance turnarounds at Keephills Units 2 and 3;
▪Distributed planned maintenance expenditures across the entire hydro fleet; and
▪Distributed expenditures across our wind fleet, focusing on planned component replacements.
There is also one major planned outage at one of our non-operated units in 2021:
▪An outage for major maintenance at Sheerness Unit 1 is in progress with expected completion in the first quarter of 2021. This work will be undertaken in parallel with the conversion to gas of this unit.
Lost production as a result of planned major maintenance, excluding planned major maintenance for Centralia, which is scheduled during a period of dispatch optimization, is estimated as follows for 2021:

| Coal | Gas and renewables | Total
GWh lost | 1,600-1,700 | 550-600 | 2,150-2,300

Funding of Capital Expenditures
Funding for these planned capital expenditures is expected to be provided by cash flow from operating activities and existing liquidity. In addition, we have access to approximately $2.1 billion, including $703 million in cash, as required. The funds required for committed growth, sustaining capital and productivity projects are not expected to be significantly impacted by the current economic environment.
A significant portion of our sustaining and productivity capital is planned major maintenance, which includes inspection, repair and maintenance of existing components, and the replacement of existing components. Planned major maintenance costs are capitalized as part of PP&E and are amortized on a straight-line basis over the term until the next major maintenance event. These costs exclude amounts for day-to-day routine maintenance, unplanned maintenance activities and minor inspections and overhauls, which are expensed as incurred.
TRANSALTA CORPORATION M55

Management’s Discussion and Analysis
Competitive Forces
Supply and demand balances are the fundamental drivers of prices for electricity. Underlying economic growth is the main driver of longer-term changes in the demand for electricity, whereas system capacity, natural gas prices, GHG pricing, government subsidies and renewable resource availability are key drivers to the supply. Growth in behind-the-fence generation for mining investments is key to developing our Australian gas segment.
Renewable capacity additions will continue as a result of government policy and evolving corporate stakeholder objectives. New supply in the near term and intermediate term is expected to come primarily from investment in renewable electricity as well as natural-gas-fired generation. This expectation is driven by the low prices in the natural gas market combined with public policies that favour carbon emission reductions.
We have substantial merchant capacity in Alberta and the Pacific Northwest. In those regions, we enter into contracts and business relationships with commercial and industrial customers to sell power for various terms, up to our available capacity in the markets. We can further reduce the portion of production not sold in advance of the spot markets through short-term physical and financial contracts, and we optimize production in real time against our position and market conditions.
We also compete for long-term contracted opportunities in renewable and gas power generation, including cogeneration, across Canada, the US and Australia. Our target customers in this area are incumbent utility providers and large industrial and mining operators.
Alberta
Approximately 54 per cent of our gross installed capacity is located in Alberta. Previously, 45 per cent of this was subject to legislated Alberta PPAs, all of which have expired as of Dec. 31, 2020.
Our portfolio of merchant assets in Alberta is a combination of hydro facilities, wind facilities, a battery storage facility and co-fired and converted natural gas-fired thermal facilities. This balance of fuel types provides us with portfolio generation diversification. It also provides us with capacity that can be monetized as ancillary services or dispatched into the energy market during times of supply tightness. We also enter into financial contracts to reduce our exposure to variable power prices on our merchant generation.
Our Clean Energy Investment Plan, which includes converting our existing Alberta coal facilities to natural gas, will position TransAlta's fleet as a low-cost generator in Alberta. Please refer to the Corporate Strategy section of this MD&A for further details.
Alberta's annual demand contracted approximately 2.5 per cent from 2019 to 2020 due to the combined impacts of COVID-19 and oil production shut-ins. The drop in demand was most significant in the second and third quarters. The average pool price decreased from $55/MWh in 2019 to $47/MWh in 2020. Pool prices were lower in each quarter compared to 2019, with additional weakness during the second quarter as a result of higher power imports into Alberta.
Our market share of offer control in Alberta in 2020 was approximately 21 per cent.
In late November 2016, we announced that we entered into an Off-Coal Agreement with the Government of Alberta that provides transition payments for the cessation of coal-fired emissions from the Keephills 3, Genesee 3 and Sheerness coal-fired facilities on or before Dec. 31, 2030. The Oct. 1, 2019 swap of the Corporation's 50 per cent ownership interest in Genesee 3 for the 50 percent interest in Keephills 3 did not impact the transition payments received under the Off-Coal Agreement. The affected facilities are not, however, precluded from generating electricity at any time by any method other than the combustion of coal.
We expect additional compliance costs as a result of the Canadian federal government’s Greenhouse Gas Pollution Pricing Act, which sets a national price on GHG emissions with each province expected to implement a GHG policy equivalent to a carbon price of $50 per tonne by 2022. We believe that our extensive portfolio of assets provides us with brownfield
TRANSALTA CORPORATION M56

Management’s Discussion and Analysis
development opportunities in wind, solar, hydro and gas that give us a cost advantage over competitors when constructing generation facilities that use these fuel types.
Pursuant to the Electric Utilities Act (Alberta), the Balancing Pool announced the complete termination of the Sundance B and C PPAs, effective March 31, 2018. As of April 1, 2018, the Sundance facility has been operated as a merchant facility.
US Pacific Northwest
Our capacity in the US Pacific Northwest has been represented by our 1,340 MW Centralia thermal facility. Half of the facility's capacity was retired at the end of 2020 and the other half is scheduled to retire at the end of 2025. Our competitiveness is enhanced by our long-term contract with Puget Sound Energy for up to 380 MW over the remaining life of the facility. We enter into short-term hedges for the remaining generation and can satisfy these or our long-term contract with power purchased from the market during low-priced periods.
Installed capacity in the region is primarily comprised of hydro and gas generation, with substantial wind capacity as well, including our Skookumchuck wind facility, which began production in November 2020. Demand growth in the region has been limited and further constrained by an emphasis on energy efficiency.
We maintain the right to redevelop Centralia as a gas facility after coal capacity retires, with an opportunity for expedited permitting provided for in our agreement for coal transition established with the State of Washington in 2011.
Contracted Gas and Renewables
The market for developing or acquiring gas and renewable generation facilities is highly competitive in all markets in which we operate. Our solid record as operator and developer supports our competitive position. We expect, where possible, to reduce our cost of capital and improve our competitive profile by using project financing and leveraging the lower cost of capital with TransAlta Renewables. In the US, our substantial tax attributes further increase our competitiveness.
While depressed commodity prices have reduced sectoral growth in the oil, gas and mining industries, the change is also creating opportunities for us as a service provider as some of our potential customers are more carefully evaluating non-core activities and driving for operational efficiencies. In renewables, we are primarily evaluating greenfield opportunities in Western Canada and the US along with acquisitions in markets in which we have existing operations. We maintain highly qualified and experienced development teams to identify and develop these opportunities. In cogeneration, we are working with customers to evaluate behind-the-fence solutions.
Some of our older gas facilities are now reaching the end of their original contract life. The facilities generally have a substantial cost advantage over new builds and we have been able to add value by recontracting these facilities with limited life extending capital expenditures. We have recently extended the life of our Ottawa (2033 expiry), Windsor (2031 expiry), Parkeston (2026 expiry), Fort Saskatchewan (2030 expiry) and Southern Cross (2038) facilities in this manner.
TRANSALTA CORPORATION M57

Management’s Discussion and Analysis
Power-Generating Portfolio Capital
We monitor availability closely as a key metric to achieving our financial targets. We adjust our maintenance and sustaining capital expenditures to optimize financial returns on our investments and to align with our strategic intentions.
Availability and Production
We achieved 85 per cent (2019 - 89 per cent, 2018 -93 per cent) availability in Alberta Thermal, a decrease from the prior year due to planned outages. North American Gas achieved 97 per cent (2019 - 95 per cent, 2018 - 93 per cent) and Wind and Solar achieved 95 per cent (2019 - 95 per cent, 2018 - 95 per cent). Australian Gas achieved 94 per cent (2019 - 91 per cent, 2018 - 94 per cent), with the increase being the result of unplanned outages in 2019.
Our availability for the entire fleet in 2020, after adjusting for dispatch optimization at Centralia, was 90 per cent (2019 - 90 per cent, 2018 - 91 per cent), consistent with last year. Lower planned and unplanned outages and derates within the generation segments were offset by the planned outages at Alberta Thermal for the Sundance Unit 6 turnaround and conversion to gas outage.
Production for the year ended Dec. 31, 2020, decreased 4,091 GWh compared to 2019. Of the total decrease, 2,822 GWh was primarily due to planned outages, curtailments and dispatch optimization reducing merchant production for Alberta Thermal. In addition, Centralia experienced reduced production of 2,021 GWh due to lower merchant pricing, timing of dispatch optimization, and both Centralia units being taken out of service for the majority of the first half of 2020.
Sustaining Capital
We are in a long-cycle, capital-intensive business that requires significant capital expenditures. Our goal is to undertake sustaining capital that ensures our facilities operate reliably and safely over a long period of time.

Year ended Dec. 31 | 2020 | 2019 | 2018
Routine capital | 52 |  | 50 |  | 50 |
Mine capital | 7 |  | 23 |  | 42 |
Planned major maintenance | 98 |  | 68 |  | 58 |
Total sustaining capital expenditures | 157 |  | 141 |  | 150 |
Productivity capital | 4 |  | 9 |  | 21 |
Total sustaining and productivity capital expenditures | 161 |  | 150 |  | 171 |
Insurance recoveries of sustaining capital expenditures | — |  | (10) |  | (7) |
Net amount | 161 |  | 140 |  | 164 |

Lost production as a result of planned major maintenance is as follows:

Year ended Dec. 31 | 2020 | 2019 | 2018
GWh lost(1) | 980 |  | 935 |  | 381 |

(1) Lost production excludes periods of planned major maintenance at Centralia, which occur during periods of dispatch optimization.
Total sustaining capital expenditures were $16 million higher compared to 2019 and total productivity capital was $5 million lower in 2020 compared to 2019. The increased focus on sustaining capital expenditures related to the planned major maintenance at Alberta Thermal for Sundance Unit 6 and conversion to gas outage. In addition, Wind and Solar had sustaining capital expenditures for the Kent Hills foundation work.
TRANSALTA CORPORATION M58

Management’s Discussion and Analysis
Other Consolidated Analysis
Asset Impairment Charges and Reversals
As part of the Corporation’s monitoring controls, long-range forecasts are prepared for each cash-generating unit ("CGU"). The long-range forecast estimates are used to assess the significance of potential indicators of impairment and provide criteria to evaluate adverse changes in operations. The Corporation also considers the relationship between our market capitalization and our book value, among other factors, when reviewing for indicators of impairment. When indicators of impairment are present, the Corporation estimates a recoverable amount for each CGU by calculating an approximate fair value less costs of disposal using discounted cash flow projections based on the Corporation’s long-range forecasts. The valuations used are subject to measurement uncertainty based on assumptions and inputs to the Corporation’s long-range forecast, including changes to fuel costs, operating costs, capital expenditures, external power prices and useful lives of the assets extending to the last planned asset retirement in 2073.
2020
Sundance Unit 3
In the third quarter of 2020, the Corporation recognized an impairment charge on Sundance Unit 3 in the amount of $70 million in the Alberta Thermal segment due to the Corporation's decision to retire the unit. Previously, the Corporation had expected Sundance Unit 3 to remain mothballed until November 2021. As there were no estimated future cash flows from power generation expected to be derived from the unit, the unit was removed from the Alberta merchant CGU and immediately written down to the recoverable value of the scrap materials.
BC Hydro Facility
In the third quarter of 2020, the Corporation recorded an impairment of $2 million in the Hydro segment, due to a review of water resources that resulted in a revision to the forecasted production at a BC hydro facility. The impairment assessment was based on fair value less costs of disposal using discounted cash flow projections based on the Corporation's long-range forecasts. The resulting fair value measurement is categorized as a Level III fair value measurement. The key assumptions impacting the determination of fair value are electricity production and sales prices, which are subject to measurement uncertainty.
Centralia Land
In the fourth quarter of 2020, the Corporation recognized an impairment of $9 million (US$7 million) in the Centralia segment due to a decrease in the fair value of the land determined through a third-party appraiser. In addition to the asset impairments noted above, a net asset impairment of $3 million was recognized for changes in the decommissioning and restoration liabilities related to the Centralia mine and Sundance Unit 1, which are no longer operating and have reached the end of their useful lives.
2019
Centralia Thermal Facility
In 2012, the Corporation recorded an impairment of $347 million relating to the Centralia thermal facility CGU. As part of the annual impairment test, the Corporation considers possible indicators of impairment at the Centralia thermal facility CGU. In 2019, an internal valuation indicated the fair value less costs of disposal of the Centralia thermal facility CGU exceeded the carrying value, resulting in a full recoverability test in 2019. The updated fair value included sustained changes in the power price market and cost of coal due to contract renegotiations. As a result of the recoverability test an impairment reversal of $151 million was recorded in the Centralia segment.
The valuations are categorized as Level III fair value measurements and subject to measurement uncertainty based on the key assumptions outlined below, and on inputs to the Corporation’s long-range forecast, including changes to fuel costs, operating costs, capital expenses and the level of contractedness under the Memorandum of Agreement ("MOA") for coal transition established with the State of Washington. The valuation period includes cash flows until the decommissioning of the facility in 2025.
The Corporation utilized the Corporation's long-range forecast and the following key assumptions in 2019 compared with 2016 assumptions, which was the most recent detailed valuation:

| 2019 | 2016
Mid-Columbia annual average power prices | US$30 to US$42 per MWh | US$22 to US$46 per MWh
On-highway diesel fuel on coal shipments | US$2.35 to US$2.40 per gallon | US$1.69 to US$2.09 per gallon
Discount rates | 5.2 to 6.4 per cent | 5.4 to 5.7 per cent

TRANSALTA CORPORATION M59

Management’s Discussion and Analysis
During 2019, the Corporation adjusted the Centralia mine decommissioning and restoration provision as management no longer believes that the fine coal recovery and reclamation work will occur as originally proposed. The Corporation's current best estimate of the decommissioning and restoration provision increased by $141 million. Since the Centralia mine is no longer operating and reached the end of its useful life in 2006, this adjustment results in the immediate recognition of the full $141 million through asset impairment charges in net earnings. Please refer to Note 3 and 23 of the consolidated financial statements for further details.
Assets Held for Sale
In the fourth quarter of 2019, the Corporation identified several trucks and associated inventory to be sold within the Alberta Thermal segment and accordingly wrote the assets down to net realizable value, resulting in an impairment charge of $15 million.
2018
Sundance Unit 2
In the third quarter of 2018, the Corporation recognized an impairment charge on Sundance Unit 2 in the amount of $38 million due to the Corporation’s decision to retire Sundance Unit 2. Previously, the Corporation had expected Sundance Unit 2 to remain mothballed for a period of up to two years and therefore remain within the Alberta Merchant CGU. The impairment assessment was based on value in use and included the estimated future cash flows expected to be derived from the unit until its retirement on July 31, 2018. Discounting did not have a material impact.
Lakeswind and Kent Breeze
On May 31, 2018, TransAlta Renewables acquired an economic interest in Lakeswind through the subscription of tracking preferred shares of a subsidiary of the Corporation and also purchased Kent Breeze. In connection with these acquisitions, the assets were fair valued using discount rates that average approximately seven per cent. Accordingly, the Corporation has recorded an impairment charge of $12 million using the valuation in the agreement as the indicator of fair value less cost of disposal in 2018. The impairment charge had an $11 million impact on PP&E and a $1 million impact on intangible assets.
Project Development Costs
During 2020, the Corporation wrote off nil (2019 - $18 million) in project development costs related to projects that are no longer proceeding.
Unconsolidated Structured Entities or Arrangements
Disclosure is required of all unconsolidated structured entities or arrangements such as transactions, agreements or contractual arrangements with unconsolidated entities, structured finance entities, special purpose entities or variable interest entities that are reasonably likely to materially affect liquidity or the availability of, or requirements for, capital resources. We currently have no such unconsolidated structured entities or arrangements.
Guarantee Contracts
We have obligations to issue letters of credit and cash collateral to secure potential liabilities to certain parties, including those related to potential environmental obligations, commodity risk management and hedging activities, pension plan obligations, construction projects and purchase obligations. At Dec. 31, 2020, we provided letters of credit totalling $621 million (2019 - $690 million) and cash collateral of $49 million (2019 - $42 million). These letters of credit and cash collateral secure certain amounts included on our Consolidated Statements of Financial Position under risk management liabilities, defined benefit obligation and other long-term liabilities, and decommissioning and other provisions.
TRANSALTA CORPORATION M60

Management’s Discussion and Analysis
Commitments
Contractual commitments are as follows:

| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 and thereafter | Total
Natural gas, transportation and other contracts | 141 |  | 149 |  | 137 |  | 134 |  | 134 |  | 1,353 |  | 2,048 |
Transmission | 8 |  | 8 |  | 8 |  | 5 |  | 5 |  | 1 |  | 35 |
Coal supply and mining agreements | 81 |  | 105 |  | 101 |  | 67 |  | 56 |  | — |  | 410 |
Long-term service agreements | 31 |  | 37 |  | 22 |  | 18 |  | 10 |  | 55 |  | 173 |
Operating leases(1) | 4 |  | 2 |  | 2 |  | 1 |  | 1 |  | 26 |  | 36 |
Long-term debt(2) | 96 |  | 626 |  | 277 |  | 119 |  | 136 |  | 2,010 |  | 3,264 |
Exchangeable securities(3) | — |  | — |  | — |  | — |  | 750 |  | — |  | 750 |
Principal payments on lease liabilities(4) | (5) |  | 6 |  | 5 |  | 5 |  | 5 |  | 118 |  | 134 |
Interest on long-term debt and lease liabilities(4,5) | 161 |  | 153 |  | 126 |  | 119 |  | 113 |  | 893 |  | 1,565 |
Interest on exchangeable securities(3,5) | 53 |  | 52 |  | 53 |  | 52 |  | — |  | — |  | 210 |
Growth | 509 |  | 411 |  | 93 |  | — |  | — |  | — |  | 1,013 |
TransAlta Energy Transition Bill | 6 |  | 6 |  | 6 |  | — |  | — |  | — |  | 18 |
Total | 1,085 |  | 1,555 |  | 830 |  | 520 |  | 1,210 |  | 4,456 |  | 9,656 |

(1) Includes leases that have not yet commenced.
(2) Excludes impact of hedge accounting and derivatives.
(3) Assumes the exchangeable securities will be exchanged by Brookfield on Jan. 1, 2025. Please refer to the Significant and Subsequent Events section of this MD&A for further details.
(4) Lease liabilities include a lease incentive of $13 million, expected to be received in 2021.
(5) Interest on long-term debt is based on debt currently in place with no assumption as to refinancing on maturity.
(6) Not recognized as a financial liability on the Consolidated Statements of Financial Position.
As part of the TransAlta Energy Transition Bill signed into law in the State of Washington and the subsequent MoA, we have committed to fund US$55 million in total over the remaining life of the Centralia thermal facility to support economic and community development, promote energy efficiency and develop energy technologies related to the improvement of the environment. The MoA contains certain provisions for termination and in the event of the termination and certain circumstances, this funding or part thereof would no longer be required. At Dec. 31, 2020, the Corporation has funded approximately US$41 million of the commitment.
Contingencies
Line Loss Rule Proceeding
The Corporation has been participating in a line loss rule proceeding before the AUC. The AUC determined that it has the ability to retroactively adjust line loss charges going back to 2006 and directed AESO to recalculate loss factors for 2006 to 2016 and issue a single invoice charging or crediting market participants for the difference in losses charges. The AESO submitted a review and variance application of this decision to implement a “pay-as-you-go” invoicing scheme rather than issue a single invoice. The AUC ruled on AESO’s request and approved a three-period invoice process (2006-2009, 2010-2013 and 2014-2016). The total liability for the loss charges was $25 million; however, due to payments made (and received) for the first two invoices, only $8 million of the total liability remains outstanding. The AESO issued the first invoice on Oct. 22, 2020, for $6 million, which was paid by Dec. 30, 2020. The second invoice was issued on Dec. 21, 2020, for $11 million. The third invoice is expected in March 2021.
In November 2020, AESO sought direction from the AUC with respect to interest payments on the loss charges, and the AUC ruled in January 2021 that simple interest (rather than compound interest) would apply to the loss charges.
FMG Disputes
The Corporation is currently engaged in a dispute with Fortescue Metals Group Ltd. ("FMG") as a result of FMG's purported termination of the South Hedland PPA. TransAlta sued FMG, seeking payments of amounts invoiced and not paid under the South Hedland PPA, as well as a declaration that the PPA is valid and in force. FMG, on the other hand, seeks a declaration that the PPA was lawfully terminated. This matter has been rescheduled to proceed to trial beginning May 3, 2021, instead of June 15, 2020.
The Corporation had a second dispute involving FMG's claims against TransAlta related to the transfer of the Solomon facility to FMG. FMG claimed certain amounts related to the condition of the facility while TransAlta claimed certain outstanding costs that should be reimbursed. The dispute was settled and discontinued in the Supreme Court of Western Australia on Sept. 9, 2020.
TRANSALTA CORPORATION M61

Management’s Discussion and Analysis
Mangrove Claim
On April 23, 2019, Mangrove commenced an action in the Ontario Superior Court of Justice, naming the Corporation, the incumbent members of the Board of Directors of the Corporation on such date and Brookfield BRP Holdings (Canada), as defendants. Mangrove is seeking to set aside the Brookfield Investment. TransAlta believes the claim is wholly lacking in merit and is taking all steps to defend against the allegations. This matter has been rescheduled and the three-week trial will begin on April 19, 2021.
Keephills 1 Stator Force Majeure Appeal
The Balancing Pool and ENMAX Energy Corporation ("ENMAX") are seeking to set aside an arbitration award on the basis that they did not receive a fair hearing. The Alberta Court of Queen’s Bench ("ABQB") dismissed the Balancing Pool and ENMAX’s allegations of unfairness on June 26, 2019. The Balancing Pool and ENMAX, however, sought leave to appeal the ABQB’s decision at the Court of Appeal, which was granted on Feb. 13, 2020. The appeal is scheduled to be heard on April 8, 2021. TransAlta believes that the Court of Appeal will affirm the ABQB decision that the arbitration proceeding was fair.
Keephills 1 Superheater Force Majeure
Keephills Unit 1 was taken offline March 17, 2015 to May 17, 2015 as a result of a large leak in the secondary superheater. TransAlta Generation Partnership claimed force majeure under the Keephills PPA. ENMAX, the PPA buyer under the PPA at the time, did not dispute the force majeure but the Balancing Pool did, seeking to recover $12 million in capacity payment charges it paid to TransAlta while the unit was offline. The Balancing Pool argued and won in the Courts that it has a right under the PPA to commence an arbitration, independent of the PPA buyer, ENMAX. An arbitration for this dispute has commenced and is set to be heard for seven days starting Dec. 6, 2021.
Sundance A Decommissioning
TransAlta filed an application with the AUC seeking payment from the Balancing Pool for TransAlta’s decommissioning costs for Sundance A, including its proportionate share of the Highvale mine. The Balancing Pool and the Utilities Consumer Advocate are participating as interveners because they take issue with the decommissioning costs claimed by TransAlta. Due to various factors, including the COVID-19 pandemic and significant information requests from the Balancing Pool, the application has been delayed. While a hearing date has not been set, the application will likely be heard in late 2021 or early 2022. TransAlta expects to receive payment from the Balancing Pool for its decommissioning costs; however, the amount that the AUC will award is uncertain.
Hydro Power Purchase Arrangement ("Hydro PPA") Emission Performance Credits Credits
The Balancing Pool claims to be entitled to emission performance credits ("EPCs"), valued at approximately $17 million per year, earned by the Hydro facilities under the Carbon Competitiveness Incentive Regulation from 2018-2020. The dispute is based on the ownership of the EPCs as a result of a change-in-law provision under the Hydro PPA and that TransAlta is benefiting from the purported change in law. TransAlta has not received any benefit from the EPCs and has not recognized any benefit from the EPCs within its financial statements. TransAlta believes that the Balancing Pool has no rights to these credits. An arbitration has commenced and will be likely set down for a hearing sometime in early 2022.
Direct Assigned Capital Deferral Account ("DACDA") Application
AltaLink Management Ltd. ("AltaLink") filed an application before the AUC to recover its 2016-2018 DACDA costs (the "Proceeding") incurred for the 240 kV line upgrades project in the Edmonton region (the “Upgrades Project”). TransAlta is a secondary applicant in the Proceeding because it owns a portion of the 1043L Line located on Enoch Cree Nation (“ECN”) Reserve that was part of the Upgrades Project. AltaLink and TransAlta sought to have their costs ($91 million for AltaLink and $22 million for TransAlta) approved by the AUC as reasonable and prudent. The ECN and the Consumers Coalition of Alberta are registered participants in the Proceeding. The AUC rendered its decision in the Proceeding on Dec. 10, 2020, and disallowed 15 per cent (approximately $3 million) of TransAlta’s portion. TransAlta believes that the AUC made errors by disallowing 15 per cent of its costs and therefore filed a permission to appeal application with the Court of Appeal (the “PTA”) and a review and variance application with the AUC (the “R&V”). The PTA will be adjourned until the R&V process is completed.
TRANSALTA CORPORATION M62

Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as accounting rules and guidance have changed. Accounting rules generally do not involve a selection among alternatives, but involve an implementation and interpretation of existing rules and the use of judgment relative to the circumstances existing in the business. Every effort is made to comply with all applicable rules on or before the effective date, and we believe the proper implementation and consistent application of accounting rules is critical.
However, not all situations are specifically addressed in the accounting literature. In these cases, our best judgment is used to adopt a policy for accounting for these situations. We draw analogies to similar situations and the accounting guidelines governing them, consider foreign accounting standards and consult with our independent auditors about the appropriate interpretation and application of these policies. Each of the critical accounting policies involves complex situations and a high degree of judgment either in the application and interpretation of existing literature or in the development of estimates that impact our consolidated financial statements.
Our significant accounting policies are described in Note 2 of the consolidated financial statements. The most critical of these policies are those related to revenue recognition, financial instruments, valuation of PP&E and associated contracts, project development costs, useful life of PP&E, valuation of goodwill, leases, income taxes, employee future benefits, decommissioning and restoration provisions, other provisions and joint arrangements. Each policy involves a number of estimates and assumptions to be made about matters that are uncertain at the time the estimate is made. Different estimates, with respect to key variables used for the calculations, or changes to estimates, could potentially have a material impact on our financial position or results of operations.
We have discussed the development and selection of these critical accounting estimates with our Audit, Finance and Risk Committee ("AFRC") and our independent auditors. The AFRC has reviewed and approved our disclosure relating to critical accounting estimates in this MD&A. These critical accounting estimates are described as follows:
Revenue Recognition
Revenue from Contracts with Customers
The majority of our revenues from contracts with customers are derived from the sale of generation capacity, electricity, thermal energy, environmental attributes and byproducts of power generation. The Corporation evaluates whether the contracts it enters into meet the definition of a contract with a customer at the inception of the contract and on an ongoing basis if there is an indication of significant changes in facts and circumstances. Revenue is measured based on the transaction price specified in a contract with a customer. Revenue is recognized when control of the good or services is transferred to the customer. For certain contracts, revenue may be recognized at the invoiced amount, as permitted using the invoice practical expedient, if such amount corresponds directly with the Corporation’s performance to date. The Corporation excludes amounts collected on behalf of third parties from revenue.
Identification of Performance Obligations
Each promised good or service is accounted for separately as a performance obligation if it is distinct. The Corporation’s contracts may contain more than one performance obligation. Where contracts contain multiple promises for goods or services, management exercises judgment in determining whether goods or services constitute distinct goods or services or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. The determination of a performance obligation affects whether the transaction price is recognized at a point in time or over time. Management considers both the mechanics of the contract and the economic and operating environment of the contract in determining whether the goods or services in a contract are distinct.
Transaction Price
The Corporation allocates the transaction price in the contract to each performance obligation. Transaction price allocated to performance obligations may include variable consideration. Variable consideration is included in the transaction price for each performance obligation when it is highly probable that a significant reversal of the cumulative variable revenue will not occur. Variable consideration is assessed at each reporting period to determine whether the constraint is lifted. The consideration contained in some of the Corporation's contracts with customers is primarily variable, and may include both variability in quantity and pricing, such as: revenues can be dependent upon future production volumes that are driven by customer or market demand or by the operational ability of the facility; revenues can be dependent upon the variable cost of producing the energy; revenues can be dependent upon market prices; and revenues can be subject to various indices and escalators.
TRANSALTA CORPORATION M63

Management’s Discussion and Analysis
In determining the transaction price and estimates of variable consideration, management considers past history of customer usage and capacity requirements when estimating the goods and services to be provided to the customer. The Corporation also considers the historical production levels and operating conditions for its variable generating assets.
Allocation of Transaction Price to Performance Obligations
When multiple performance obligations are present in a contract, transaction price is allocated to each performance obligation in an amount that depicts the consideration the Corporation expects to be entitled to in exchange for transferring the good or service.
The Corporation’s contracts generally outline a specific amount to be invoiced to a customer associated with each performance obligation in the contract. Where contracts do not specify amounts for individual performance obligations, the Corporation estimates the amount of the transaction price to allocate to individual performance obligations based on their standalone selling price, which is primarily estimated based on the amounts that would be charged to customers under similar market conditions.
Satisfaction of Performance Obligations
The satisfaction of performance obligations requires management to use judgment as to when control of the underlying good or service transfers to the customer. Determining when a performance obligation is satisfied affects the timing of revenue recognition. Management considers both customer acceptance of the good or service, and the impact of laws and regulations such as certification requirements, in determining when this transfer occurs. Management also applies judgment in determining whether the invoice practical expedient permits recognition of revenue at the invoiced amount, if that invoiced amount corresponds directly with the entity's performance to date.
The Corporation recognizes a significant financing component where the timing of payment from the customer differs from the Corporation’s performance under the contract and where that difference is the result of the Corporation financing the transfer of goods and services.
Revenue from Other Sources
Lease Revenue
In certain situations, a long-term electricity or thermal sales contract may contain, or be considered, a lease. Revenues associated with non-lease elements are recognized as goods or services revenues as outlined above. Where the terms and conditions of the contract result in the customer assuming the principal risks and rewards of ownership of the underlying asset, the contractual arrangement is considered a finance lease, which results in the recognition of finance lease income. Where we retain the principal risks and rewards, the contractual arrangement is an operating lease. Rental income, including contingent rents where applicable, is recognized over the term of the contract.
Revenue from Derivatives
Commodity risk management activities involve the use of derivatives such as physical and financial swaps, forward sales contracts, futures contracts and options that are used to earn revenues and to gain market information. These derivatives are accounted for using fair value accounting. The initial recognition and subsequent changes in fair value affect reported net earnings in the period the change occurs and are presented on a net basis in revenue. The fair values of instruments that remain open at the end of the reporting period represent unrealized gains or losses and are presented on the Consolidated Statements of Financial Position as risk management assets or liabilities.
The determination of the fair value of commodity risk management contracts and derivative instruments is complex and relies on judgments concerning future prices, volatility and liquidity, among other factors. Some of our derivatives are not traded on an active exchange or extend beyond the time period for which exchange-based quotes are available, requiring us to use internal valuation techniques or models described below.
Financial Instruments
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values can be determined by reference to prices for instruments in active markets to which we have access. In the absence of an active market, we determine fair values based on valuation models or by reference to other similar products in active markets.
Fair values determined using valuation models require the use of assumptions. In determining those assumptions, we look primarily to external readily observable market inputs. However, if not available, we use inputs that are not based on observable market data.
TRANSALTA CORPORATION M64

Management’s Discussion and Analysis
Level Determinations and Classifications
The Level I, II and III classifications in the fair value hierarchy utilized by the Corporation are defined below. The fair value measurement of a financial instrument is included in only one of the three levels, the determination of which is based on the lowest level input that is significant to the derivation of the fair value.
Level I
Fair values are determined using inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. In determining Level I fair values, we use quoted prices for identically traded commodities obtained from active exchanges such as the New York Mercantile Exchange.
Level II
Fair values are determined, directly or indirectly, using inputs that are observable for the asset or liability.
Fair values falling within the Level II category are determined through the use of quoted prices in active markets, which in some cases are adjusted for factors specific to the asset or liability, such as basis, credit valuation and location differentials. Our commodity risk management Level II financial instruments include over-the-counter derivatives with values based on observable commodity futures curves and derivatives with inputs validated by broker quotes or other publicly available market data providers. Level II fair values are also determined using valuation techniques, such as option pricing models and interpolation formulas, where the inputs are readily observable.
In determining Level II fair values of other risk management assets and liabilities, we use observable inputs other than unadjusted quoted prices that are observable for the asset or liability, such as interest rate yield curves and currency rates. For certain financial instruments where insufficient trading volume or lack of recent trades exists, we rely on similar interest or currency rate inputs and other third-party information such as credit spreads.
Level III
Fair values are determined using inputs for the asset or liability that are not readily observable.
We may enter into commodity transactions for which market-observable data is not available. In these cases, Level III fair values are determined using valuation techniques such as mark-to-forecast and mark-to-model. For mark-to-model valuations, derivative pricing models, regression-based models and historical bootstrap models may be employed. The model inputs may be based on historical data such as unit availability, transmission congestion, demand profiles for individual non-standard deals and structured products, and/or volatilities and correlations between products derived from historical price relationships. We also have various contracts with terms that extend beyond a liquid trading period. As forward market prices are not available for the full period of these contracts, the value of these contracts is derived by reference to a forecast that is based on a combination of external and internal fundamental modelling, including discounting. As a result, these contracts are classified in Level III.
Our Commodity Exposure Management Policy governs both the commodity transactions undertaken in our proprietary trading business and those undertaken to manage commodity price exposures in our generation business. This Policy defines and specifies the controls and management responsibilities associated with commodity trading activities, as well as the nature and frequency of required reporting of such activities.
Methodologies and procedures regarding commodity risk management Level III fair value measurements are determined by our risk management department. Level III fair values are calculated within our energy trading risk management system based on underlying contractual data as well as observable and non-observable inputs. Development of non-observable inputs requires the use of judgment. To ensure reasonability, system-generated Level III fair value measurements are reviewed and validated by the risk management and finance departments. Review occurs formally on a quarterly basis or more frequently if daily review and monitoring procedures identify unexpected changes to fair value or changes to key parameters.
The effect of using reasonably possible alternative assumptions as inputs to valuation techniques for contracts included in the Level III fair value measurements at Dec. 31, 2020, is an estimated total upside of $68 million (2019 - $79 million upside) and total downside of $94 million (2019 - $172 million) impact to the carrying value of the financial instruments. Fair values are stressed for volumes and prices. The amount of $35 million upside (2019 - $46 million upside) and $59 million downside (2019 - $139 million downside) in the stress values stems from a long-dated power sale contract in the Pacific Northwest that is designated as a cash flow hedge utilizing assumed power prices ranging from US$24 to US$32/MWh (Dec. 31, 2019 - US$20-US$28/MWh) for the period beyond the liquid period, while the remaining amounts account for the rest of the portfolio. The variable volumes are stressed up and down one standard deviation from
TRANSALTA CORPORATION M65

Management’s Discussion and Analysis
historically available production data. Prices are stressed for longer-term deals where there are no liquid market quotes using various internal and external forecasting sources to establish a high and a low price range.
In addition to the Level III fair value measurements discussed above, the Brookfield Investment allows Brookfield the option to exchange all of the outstanding exchangeable securities into an equity ownership interest of up to a maximum of 49 per cent in an entity formed to hold TransAlta’s Alberta Hydro Assets after Dec. 31, 2024. The fair value of the option to exchange is considered a Level III fair value measurement, with an estimated downside of $33 million (2019 - $27 million downside) potential impact to the carrying value of nil as at Dec. 31, 2020 (2019 - nil). The sensitivity analysis has been prepared using the Corporation’s assessment that a change in the implied discount rate of the future cash flow of one per cent is a reasonably possible change.
Inventory
The Corporation’s inventory balance is comprised of coal and natural gas used as fuel, which is measured at the lower of weighted average cost and net realizable value. At the end of each reporting period, we assess whether our inventory should be written down to its net realizable value as a result of reduced movement in inventory, lower commodity prices or other events and circumstances that might indicate the cost of the inventory is no longer recoverable.
Determining the amount of the net realizable value requires significant judgment and can vary based on the estimates such as estimated production levels, consumption and sales prices.
Valuation of PP&E and Associated Contracts
At the end of each reporting period, we assess whether there is any indication that PP&E and finite life intangible assets are impaired or whether a previously recognized impairment may no longer exist or may have decreased. Impairment exists when the carrying amount of the asset or CGU to which it belongs exceeds its recoverable amount, which is the higher of fair value less costs of disposal and value in use.
Factors that could indicate that an impairment exists include: significant underperformance relative to historical or projected operating results; significant changes in the manner in which an asset is used or in our overall business strategy; or significant negative industry or economic trends. In some cases, these events are clear. However, in many cases, a clearly identifiable event indicating possible impairment does not occur. Instead, a series of individually insignificant events occur over a period of time leading to an indication that an asset may be impaired. This can be further complicated in situations where we are not the operator of the facility. Events can occur in these situations that may not be known until a date subsequent to their occurrence.
Our operations, the market and business environment are routinely monitored, and judgments and assessments are made to determine whether an event has occurred that indicates a possible impairment. If such an event has occurred, an estimate is made of the recoverable amount of the asset or CGU to which the asset belongs. The recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. In determining fair value less costs of disposal, information about third-party transactions for similar assets is used and if none is available, other valuation techniques, such as discounted cash flows, are used. Value in use is computed using the present value of management’s best estimates of future cash flows based on the current use and present condition of the asset. In estimating either fair value less costs of disposal or value in use using discounted cash flow methods, estimates and assumptions must be made about sales prices, cost of sales, production, fuel consumed, capital expenditures, retirement costs and other related cash inflows and outflows over the life of the facilities, which can range from 30 to 60 years. In developing these assumptions, management uses estimates of contracted and future market prices based on expected market supply and demand in the region in which the facility operates, anticipated production levels, planned and unplanned outages, changes to regulations and transmission capacity or constraints for the remaining life of the facilities.
Discount rates are determined by employing a weighted average cost of capital methodology that is based on capital structure, cost of equity and cost of debt assumptions based on comparable companies with similar risk characteristics and market data as the asset, CGU or group of CGUs subject to the test. These estimates and assumptions are susceptible to change from period to period and actual results can, and often do, differ from the estimates, and can have either a positive or negative impact on the estimate of the impairment charge, and may be material.
The impairment outcome can also be impacted by the determination of CGUs or groups of CGUs for asset and goodwill impairment testing. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets, and goodwill is allocated to each CGU or group of CGUs that is expected to benefit from the synergies of the acquisition from which the goodwill arose. The allocation of
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goodwill is reassessed upon changes in the composition of segments, CGUs or groups of CGUs. In respect of determining CGUs, significant judgment is required to determine what constitutes independent cash flows between power facilities that are connected to the same system. We evaluate the market design, transmission constraints and the contractual profile of each facility, as well as our commodity price risk management plans and practices, in order to inform this determination. With regard to the allocation or reallocation of goodwill, significant judgment is required to evaluate synergies and their impacts. Minimum thresholds also exist with respect to segmentation and internal monitoring activities. We evaluate synergies with regard to opportunities from combined talent and technology, functional organization and future growth potential, and we consider our own performance measurement processes in making this determination. No changes arose in our CGUs in 2020.
Impairment charges can be reversed in future periods if circumstances improve. No assurances can be given if any reversal will occur or the amount or timing of any such reversal. As a result of our review in 2020 and other specific events, various analyses were completed to assess the significance of possible impairment indicators. Please refer to the Other Consolidated Analysis section of this MD&A for further details.
Project Development Costs
Project development costs include external, direct and incremental costs that are necessary for completing an acquisition or construction project. These costs are recognized in operating expenses until construction of a facility or acquisition of an investment is likely to occur, there is reason to believe that future costs are recoverable, and that efforts will result in future value to us, at which time the costs incurred subsequently are included in PP&E or other assets. The appropriateness of capitalization of these costs is evaluated each reporting period, and amounts capitalized for projects no longer probable of occurring are charged to net earnings.
Useful Life of PP&E
Each significant component of an item of PP&E is depreciated over its estimated useful life. A component is a tangible asset that can be separately identified as an asset and is expected to provide a benefit of greater than one year. Estimated useful lives are determined based on current facts and past experience, and take into consideration the anticipated physical life of the asset, existing long-term sales agreements and contracts, current and forecasted demand, the potential for technological obsolescence and regulations. The useful lives of PP&E and depreciation rates used are reviewed at least annually to ensure they continue to be appropriate.
In 2020, total depreciation and amortization expense was $798 million (2019 - $709 million; 2018 - $710 million), of which $144 million (2019 - $119 million; 2018 - $136 million) relates to mining equipment and is included in fuel, carbon compliance and purchased power.
As a result of the Clean Energy Investment Plan described in the Corporate Strategy section of this MD&A, we will convert our existing Alberta coal assets to natural gas and therefore the useful lives of the PP&E and amortizable intangibles associated with some of our Alberta coal assets were updated to reflect these changes. For certain Wind and Solar PP&E we identified additional components for parts with shorter useful lives than originally estimated and revised the useful lives accordingly. See the Accounting Changes section of this MD&A for further details.
Valuation of Goodwill
We evaluate goodwill for impairment at least annually, or more frequently if indicators of impairment exist. If the carrying amount of a CGU or group of CGUs, including goodwill, exceeds the unit’s fair value, the excess represents a goodwill impairment loss.
For purposes of the 2020, 2019 and 2018 annual goodwill impairment reviews, the Corporation determined the recoverable amounts of the CGUs by calculating the fair value less costs of disposal using discounted cash flow projections based on the Corporation’s long-range forecasts for the period extending to the last planned asset retirement in 2073. The resulting fair value measurement is categorized within Level III of the fair value hierarchy.
We reviewed the carrying amount of goodwill prior to year-end and determined that the fair values of the related CGUs or groups of CGUs to which goodwill relates, based on estimates of future cash flows, exceeded their carrying amounts, and no goodwill impairments existed.
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Management’s Discussion and Analysis
Determining the fair value of the CGUs or group of CGUs is susceptible to changes from period to period as management is required to make assumptions about future cash flows, production and trading volumes, margins, and fuel and operating costs. No reasonably possible change in the assumptions would have resulted in an impairment of goodwill.
Leases
In determining whether our contracts contain, or are, leases, management must use judgment in assessing whether the contract provides the customer with the right to substantially all of the economic benefits from the use of the asset during the lease term and whether the customer obtains the right to direct the use of the asset during the lease term. For those agreements considered to contain, or be, leases, further judgment is required to determine the lease term by assessing whether termination or extension options are reasonably certain to be exercised. Judgment is also applied in identifying in-substance fixed payments (included) and variable payments that are based on usage or performance factors (excluded) and in identifying lease and non-lease components (services that the supplier performs) of contracts and in allocating contract payments to lease and non-lease components.
For leases where we are a lessor, judgment is required to determine if substantially all of the significant risks and rewards of ownership are transferred to the customer or remain with us, to appropriately account for the agreement as either a finance or operating lease. These judgments can be significant and impact how we classify amounts related to the arrangement as either PP&E or as a finance lease receivable on the Consolidated Statements of Financial Position, and therefore the amount of certain items of revenue and expense are dependent upon such classifications.
Income Taxes
In accordance with IFRS, we use the liability method of accounting for income taxes. Under the liability method, deferred income tax assets and liabilities are recognized on the differences between the carrying amounts of assets and liabilities and their respective income tax basis (temporary differences). A deferred income tax asset may also be recognized for the benefit expected from unused tax credits and losses available for carryforward, to the extent that it is probable that future taxable earnings will be available against which the tax credits and losses can be applied.
Preparation of the consolidated financial statements involves determining an estimate of, or provision for, income taxes in each of the jurisdictions in which we operate. The process also involves making an estimate of taxes currently payable and income taxes expected to be payable or recoverable in future periods, referred to as deferred income taxes. Deferred income taxes result from the effects of temporary differences due to items that are treated differently for tax and accounting purposes. The tax effects of these differences are reflected in the Consolidated Statements of Financial Position as deferred income tax assets and liabilities. An assessment must also be made to determine the likelihood that our future taxable income will be sufficient to permit the recovery of deferred income tax assets. To the extent that such recovery is not probable, deferred income tax assets must be reduced. The reduction of the deferred income tax asset can be reversed if the estimated future taxable income improves. No assurances can be given if any reversal will occur or the amount or timing of any such reversal. Management must exercise judgment in its assessment of continually changing tax interpretations, regulations, and legislation to ensure deferred income tax assets and liabilities are complete and fairly presented. Differing assessments and applications than our estimates could materially impact the amount recognized for deferred income tax assets and liabilities. Our tax filings are subject to audit by taxation authorities. The outcome of some audits may change our tax liability, although we believe that we have adequately provided for income taxes in accordance with IFRS based on all information currently available. The outcome of pending audits is not known nor is the potential impact on the consolidated financial statements determinable.
A net deferred income tax liability of $345 million (2019 - $454 million) has been recorded on the Consolidated Statements of Financial Position as at Dec. 31, 2020. This primarily relates to income tax deductions in excess of related depreciation of PP&E of $717 million (2019 - $828 million) and taxes on unrealized gains from risk management transactions of $107 million (2019 - $141 million), partially offset by temporary differences related to future decommissioning and restoration costs of $140 million (2019 - $122 million) and net operating loss carryforwards of $222 million (2019 - $252 million). We believe there will be sufficient taxable income that will permit the use of these loss carryforwards in the tax jurisdictions where they exist. Additional US tax losses are available for use for which no deferred income tax assets have been recognized.
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Management’s Discussion and Analysis
Employee Future Benefits
We provide selected pension and other post-employment benefits to employees, such as health and dental benefits. The cost of providing these benefits is dependent upon many factors, including actual plan experience and estimates and assumptions about future experience.
The liabilities for pension, other post-employment benefits and associated pension costs included in annual compensation expenses are impacted by employee demographics, including age, compensation levels, employment periods, the level of contributions made to the plans and earnings on plan assets.
Changes to the provisions of the plans may also affect current and future pension costs. Pension costs may also be significantly impacted by changes in key actuarial assumptions, including, for example, the discount rates used in determining the defined benefit obligation and the net interest cost on the net defined benefit liability. The discount rate used to estimate our obligation reflects high-quality corporate fixed income securities currently available and expected to be available during the period to maturity of the pension benefits.
The plan assets are comprised primarily of equity and fixed income investments. Fluctuations in the return on plan assets as a result of actual equity market returns and changes in interest rates may result in increased or decreased pension costs in future periods.
Decommissioning and Restoration Provisions
We recognize decommissioning and restoration provisions for generating facilities and mine sites in the period in which they are incurred if there is a legal or constructive obligation to remove the facilities and restore the site. The amount recognized as a provision is the best estimate of the expenditures required to settle the provision. Expected values are probability weighted to deal with the risks and uncertainties inherent in the timing and amount of settlement of many decommissioning and restoration provisions. Expected values are discounted at the current market-based risk-free interest rate adjusted to reflect the market’s evaluation of our credit standing.
As at Dec. 31, 2020, the decommissioning and restoration provisions recorded on the Consolidated Statements of Financial Position was $608 million (2019 - $501 million). During 2020, the Corporation adjusted the Highvale mine decommissioning and restoration provision to reflect the mine closure advancement, an updated mine plan and current mining activity, including increased volume of material movement. As at Dec. 31, 2020, the decommissioning and restoration provision for Highvale mine was $153 million (2019 - $91 million) for reclamation work anticipated through 2046. The majority of the reclamation work is expected to be complete by 2040. Please refer to the Accounting Changes section of this MD&A for further details. This increase was partially offset by a decrease in the Sarnia decommissioning and restoration provision as a result of an updated engineering study. In addition, due to volatility within the market as a result of COVID-19, we have seen movement within the discount rates as a result of changes in credit spreads. As a result, on average, these rates decreased by approximately 0.3 to 0.9 per cent.
During 2019, we adjusted the Centralia mine decommissioning and restoration provision as management no longer believes that the fine coal recovery and reclamation work will be completed as originally proposed. As at Dec. 31, 2020, the decommissioning and restoration provision for Centralia mine was $174 million (2019 - $178 million) for reclamation work anticipated through 2035. Please refer to the Accounting Changes section of this MD&A for further details. In addition, as a result of the changes in estimated useful lives, described in the Accounting Changes section, the discount rates used for the Alberta Thermal and mining operations decommissioning provisions were changed due to the change in useful life.
We estimate the undiscounted amount of cash flow required to settle the decommissioning and restoration provisions is approximately $1.4 billion, which will be incurred between 2021 and 2073. The majority of these costs will be incurred between 2025 and 2050.
Sensitivities for the major assumptions are as follows:

Factor | Increase or decrease (%) | Approximate impact on net earnings
Discount rate | 1 |  | 6 |
Undiscounted decommissioning and restoration provision | 10 |  | 3 |

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Management’s Discussion and Analysis
Other Provisions
Where necessary, we recognize provisions arising from ongoing business activities, such as interpretation and application of contract terms, ongoing litigation and force majeure claims. These provisions, and subsequent changes thereto, are determined using our best estimate of the outcome of the underlying event and can also be impacted by determinations made by third parties, in compliance with contractual requirements. The actual amount of the provisions that may be required could differ materially from the amount recognized.
During the fourth quarter of 2020, an onerous contract provision of $29 million was recognized as a result of a decision to accelerate the plans to eliminate coal as a fuel source at the Sheerness facility by the end of 2021. The last coal shipment is expected to be received during the first quarter of 2021, while payments required under the contract will continue until 2025.
Classification of Joint Arrangements
Upon entering into a joint arrangement, the Corporation must classify it as either a joint operation or joint venture, and the classification affects the accounting for the joint arrangement. In making this classification, the Corporation exercises judgment in evaluating the terms and conditions of the arrangement to determine whether the parties have rights to the assets and obligations or rights to the net assets. Factors such as the legal structure, contractual arrangements and other facts and circumstances, such as where the purpose of the arrangement is primarily for the provision of the output to the parties and when the parties are substantially the only source of cash flows for the arrangement, must be evaluated to understand the rights of the parties to the arrangement.
Accounting Changes
Current Accounting Changes
I. Amendments to IAS 1 and IAS 8 Definition of Material
The Corporation adopted the amendments to IAS 1 and IAS 8 as of Jan. 1, 2020. The amendments provide a new definition of material that states “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”
The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the consolidated financial statements of, nor is there expected to be any future impact to, the Corporation.
II. Amendments to IFRS 7 and 9 Interest Rate Benchmark Reform
In September 2019, the IASB issued amendments to reporting standards relating to Interest Rate Benchmark Reform by amending IFRS 9, IAS 39 and IFRS 7. These amendments provide temporary relief during the period of uncertainty from applying specific hedge accounting requirements to hedging relationships directly affected by the ongoing interest rate benchmark reforms. These amendments are mandatory for annual periods beginning on or after Jan. 1, 2020. The Corporation adopted these amendments as of Jan. 1, 2020. There were no hedging relationships that were directly affected on Jan. 1, 2020.
During the first quarter of 2020, the Corporation entered into cash flow hedges of interest rate risk associated with a future forecasted debt issuance using derivative instruments based on the London Interbank Offered Rate ("LIBOR"). As a temporary relief, provided by the IFRS 9 amendments, the Corporation has assumed that the LIBOR interest rate on which the cash flows of the interest rate swaps are based is not altered by interbank offered rates ("IBOR") reform when assessing if the hedge is highly effective.
Note 2 and 3 of the consolidated financial statements include a more detailed discussion of our accounting policies.
Change in Estimates
Alberta Thermal
During the third quarter of 2020, the Board approved the accelerated shutdown of the Highvale mine by the end of 2021 and accordingly the useful life of the related assets was adjusted to align with the Corporation's conversion to gas plans. As at Dec. 31, 2020, the carrying value of the Highvale mine, including PP&E, right-of-use assets and intangible assets, was $373 million.
As a result of the Clean Energy Investment Plan described in the Corporate Strategy section of this MD&A, we adjusted the useful lives of certain coal assets, effective Sept. 1, 2019. Assets used only for coal-burning operations were adjusted to shorten their useful lives whereas other asset lives were extended as they were identified as being used after the
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conversion to gas or combined-cycle conversions. Due to the impact of shortening the lives of the coal assets, overall depreciation expense for the year ended Dec. 31, 2020, increased by approximately $15 million.
Wind and Solar
During 2019, we reviewed the allocation of the costs recognized for the components of the Wind and Solar PP&E and the useful lives for these identified components. As a result of the review, additional components were identified for parts where the useful lives are shorter than the original estimate. The useful life of each of these components was reduced from 30 years to either 15 years or 10 years. Accordingly, depreciation expense for the year ended Dec. 31, 2019, increased by approximately $11 million.
Sheerness
In 2019, we adjusted the useful life of the Sheerness coal-fired facility assets to align with the dual-fuel conversion plans. As a result, the assets used for coal-burning operations as well as the other asset lives were extended and depreciation expense for the year ended Dec. 31, 2019, decreased by approximately $8 million.
The useful lives may be revised or extended in compliance with the Corporation's accounting policies, dependent upon future operating decisions and events.
Sarnia
In the fourth quarter of 2020, the Corporation adjusted the Sarnia decommissioning and restoration provision to reflect an updated engineering study. The Corporation's current best estimate of the decommissioning and restoration provision decreased by $15 million. This resulted in a decrease in the related assets in PP&E.
Highvale
In the third quarter of 2020, the Corporation adjusted the Highvale mine decommissioning and restoration provision to reflect the mine closure advancement, an updated mine plan and current mining activity, including increased volume of material movement. The Corporation's current best estimate of the decommissioning and restoration provision increased by $75 million. This resulted in an increase in the related assets in PP&E.
Centralia
In 2019, we adjusted the Centralia mine decommissioning and restoration provision as management no longer believes that the fine coal recovery and reclamation work will be completed as originally proposed. The Corporation's current best estimate of the decommissioning and restoration provision increased by $141 million. Since the Centralia mine is no longer operating and reached the end of its useful life in 2006, this adjustment results in the immediate recognition of the full $141 million, through asset impairment charges in net earnings.
TransAlta estimates that the undiscounted amount of cash flow required to settle this additional obligation is approximately $222 million, which will be incurred between 2021 and 2035. The provision may be revised in compliance with the Corporation's accounting policies, dependent upon future operating decisions and as more information becomes available.
For further details and changes in estimates relating to prior years, please refer to the Other Consolidated Analysis section of this MD&A and Note 3 of the consolidated financial statements.
Future Accounting Changes
Amendments to IAS 16 Property, Plant and Equipment: Proceeds before Intended Use
The Corporation plans to early adopt the Amendments to IAS 16 Property, Plant and Equipment: Proceeds before Intended Use on Jan. 1, 2021. The amendment has a mandatory effective date of Jan. 1, 2022. The amendments prohibit deducting from the cost of an item of PP&E any proceeds from selling items produced while bringing the asset to the location and condition necessary for it to be capable of operating. No adjustments are expected from early adopting the amendments.
IFRS 7 Financial Instruments - Disclosures - Interest Rate Benchmark Reform
The IASB issued Interest Rate Benchmark Reform - Phase 2 in August 2020, which amends IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures and IFRS 16: Leases. The amendments are effective Jan. 1, 2021, and will be adopted by the Corporation in 2021, no financial impact is expected upon adoption.
Comparative Figures
Certain comparative figures have been reclassified to conform to the current period’s presentation. These reclassifications did not impact previously reported net earnings.
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Management’s Discussion and Analysis
Financial Instruments
Financial instruments are used for proprietary trading purposes and to manage our exposure to interest rates, commodity prices and currency fluctuations, as well as other market risks. We may currently use physical and financial swaps, forward sale and purchase contracts, futures contracts, foreign exchange contracts, interest rate swaps and options to achieve our risk management objectives. Some of our physical commodity contracts have been entered into and are held for the purposes of meeting our expected purchase, sale, or usage requirements (“own use”) and as such, are not considered financial instruments and are not recognized as a financial asset or financial liability. Other physical commodity contracts that are not held for normal purchase or sale requirements and derivative financial instruments are recognized on the Consolidated Statements of Financial Position and are accounted for using the fair value method of accounting. The initial recognition of fair value and subsequent changes in fair value can affect reported earnings in the period the change occurs if hedge accounting is not elected. Otherwise, changes in fair value will generally not affect earnings until the financial instrument is settled.
Some of our financial instruments and physical commodity contracts qualify for, and are recorded under, hedge accounting rules. The accounting for those contracts for which we have elected to apply hedge accounting depends on the type of hedge. Our financial instruments are mainly used for cash flow hedges or non-hedges. These categories and their associated accounting treatments are explained in further detail below.
For all types of hedges, we test for effectiveness at the end of each reporting period to determine if the instruments are performing as intended and hedge accounting can still be applied. The financial instruments we enter into are designed to ensure that future cash inflows and outflows are predictable. In a hedging relationship, the effective portion of the change in the fair value of the hedging derivative does not impact net earnings, while any ineffective portion is recognized in net earnings.
We have certain contracts in our portfolio that, at their inception, do not qualify for, or we have chosen not to elect to apply, hedge accounting. For these contracts, we recognize in net earnings mark-to-market gains and losses resulting from changes in forward prices compared to the price at which these contracts were transacted. These changes in price alter the timing of earnings recognition, but do not necessarily determine the final settlement amount received. The fair value of future contracts will continue to fluctuate as market prices change. The fair value of derivatives that are not traded on an active exchange, or extend beyond the time period for which exchange-based quotes are available, are determined using valuation techniques or models.
Cash Flow Hedges
Cash flow hedges are categorized as project, foreign exchange, interest rate or commodity hedges and are used to offset foreign exchange, interest rate and commodity price exposures resulting from market fluctuations.
Foreign currency forward contracts may be used to hedge foreign exchange exposures resulting from anticipated contracts and firm commitments denominated in foreign currencies, primarily related to capital expenditures, and currency exposures related to US-denominated debt.
Physical and financial swaps, forward sale and purchase contracts, futures contracts and options may be used primarily to offset the variability in future cash flows caused by fluctuations in electricity and natural gas prices. Foreign exchange forward contracts and cross-currency swaps may be used to offset the exposures resulting from foreign-denominated long-term debt. Interest rate swaps may be used to convert the fixed interest cash flows related to interest expense at debt to floating rates and vice versa.
In a cash flow hedge, changes in the fair value of the hedging instrument (a forward contract or financial swap, for example) are recognized in risk management assets or liabilities, and the related gains or losses are recognized in other comprehensive income ("OCI"). These gains or losses are subsequently reclassified from OCI to net earnings in the same period as the hedged forecast cash flows impact net earnings, and offset the losses or gains arising from the forecast transactions. For project hedges, the gains and losses reclassified from OCI are included in the carrying amount of the related PP&E.
Hedge accounting follows a principles-based approach for qualifying hedges, which is aligned with an entity's approach to risk management. When we do not elect hedge accounting or when the hedge is no longer effective and does not qualify for hedge accounting, the gains or losses as a result of changes in prices, interest or exchange rates related to these financial instruments are recorded in net earnings in the period in which they arise.
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Management’s Discussion and Analysis
Net Investment Hedges
Foreign-denominated long-term debt is used to hedge exposure to changes in the carrying values of our net investments in foreign operations that have a functional currency other than the Canadian dollar. Our net investment hedges using US-denominated debt remain effective and in place. Gains or losses on these instruments are recognized and deferred in OCI and reclassified to net earnings on the disposal of the foreign operation. We also manage foreign exchange risk by matching foreign-denominated expenses with revenues, such as offsetting revenues from our US operations with interest payments on our US-dollar debt.
Non-Hedges
Financial instruments not designated as hedges are used for proprietary trading and to reduce commodity price, foreign exchange and interest rate risks. Changes in the fair value of financial instruments not designated as hedges are recognized in risk management assets or liabilities, and the related gains or losses are recognized in net earnings in the period in which the change occurs.
Fair Values
The majority of fair values for our project, foreign exchange, interest rate, commodity hedges and non-hedge derivatives are calculated using adjusted quoted prices from an active market or inputs validated by broker quotes. We may enter into commodity transactions involving non-standard features for which market-observable data is not available. These transactions are defined under IFRS as Level III instruments. Level III instruments incorporate inputs that are not observable from the market, and fair value is therefore determined using valuation techniques. Fair values are validated by using reasonably possible alternative assumptions as inputs to valuation techniques, and any material differences are disclosed in the notes to the consolidated financial statements. At Dec. 31, 2020, Level III instruments had a net asset carrying value of $582 million (2019 - $686 million). Please refer to the Critical Accounting Policies and Estimates section of this MD&A for further details regarding valuation techniques. Our risk management profile and practices have not changed materially from Dec. 31, 2019.
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Management’s Discussion and Analysis
Environment, Social and Governance (“ESG”)
Sustainability or ESG management and performance is a priority at TransAlta. Sustainability is one of our core values, which means it is part of our corporate culture. We perpetually strive to further integrate sustainability into our governance, decision-making, risk management and day-to-day business processes, while enabling our growth strategy. The ultimate outcome of our sustainability focus is continuous improvement on key, material ESG issues and ensuring our economic value creation is balanced with a value proposition for the environment and our stakeholders. Over time, we have set ourselves apart with actions that demonstrate ESG leadership:
▪We have reported on sustainability for over 25 years, and 2020 reporting marks our sixth year of integrating financial and sustainability disclosure;
▪Today, we are proud to be one of the largest producers of wind power in Canada and the largest producer of hydro power in Alberta - we have grown our renewable energy capacity from approximately 900 MW in 2000 to over 2,500 MW in 2020;
▪Through the period 2002 to 2025 and by way of retirements, gas conversions and expected gas conversions or repowerings, we are on track to transition over 5,000 MW of coal capacity. In 2026, we will be completely off of coal power generation;
▪We have reduced our annual emissions by over 25 million tonnes of carbon dioxide equivalent ("CO 2 e") since 2005, which is approximately a 61 per cent reduction over the time period and highlights our decarbonization track record: this is the equivalent annual GHG emissions of a small country;
▪Our 2030 GHG reduction target supports further reductions and in 2021, we have established a new company-wide target to achieve carbon neutrality by 2050;
▪In 2020, CDP (the global disclosure system for environmental impacts known formerly as Carbon Disclosure Project) recognized TransAlta with an A- score, ranking us among industry leaders on climate change management;
▪We continue to evolve our leading sustainability target setting process that links targets to sustainability and financial materiality, sets macro targets that are both year-over-year and long term, and involves executive team and Board approval;
▪In 2020, TransAlta formed an Equity, Diversity and Inclusion Council and empowered this Council to develop a long-term equity, diversity and inclusion strategy. TransAlta also adopted a Equity, Diversity and Inclusion Pledge unanimously supported by our Board and executive team;
▪In 2021, TransAlta was once again added to the Bloomberg Gender-Equality Index — recognition of our focus on equity, diversity and inclusion;
▪In 2020, the Globe and Mail reported that we moved from a ranking of 48 to a ranking of 14 in their annual "Board Games" report. Board Games assesses the work of Canada’s largest boards of directors against a rigorous set of governance criteria (well beyond the minimum set by regulators), covering board composition, compensation, shareholder rights and disclosure. The Board Games are undertaken by the Globe and Mail in collaboration with the University of Toronto;
▪Our Indigenous youth education target ensures ongoing Indigenous youth education support and, in 2021, we are establishing a new company-wide Indigenous cultural education and awareness target; and
▪We participate in and are members of key sustainability organizations and working groups such as the EXCEL Partnership, the Canadian Business for Social Responsibility, the Energy Sector Sustainability Leadership Initiative, Canadian Electricity Association Sustainable Electricity Steering Committee and Future-Fit, which all provide validation and support of our sustainability strategy.
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Management’s Discussion and Analysis
Sustainability Strategy
Our business is electricity. We keep the lights on, our technology charged and critical infrastructure running. We support commercial and industrial customers across three countries. In total, we own 75 power-generating facilities across Australia, Canada and the US. We are invested in a mix of wind, solar, hydro, energy storage, natural gas and coal assets for a total of approximately 8,000 MW of owned generating capacity.
Our key strategic sustainability pillars build on our corporate strategy and weave through our business. Some of these focus areas are already part of our DNA, and our track record in these areas illustrates our commitment to sustainability (including climate change leadership and safety). In other areas where we have set new goals in recent years (including, equity, diversity and inclusion), we believe the focus will only strengthen our corporate strategy and support value creation into the future. Our pillars include:
1.Clean, Reliable and Sustainable Electricity Production
2.Safe, Healthy, Diverse, and Engaged Workplace
3.Positive Indigenous, Stakeholder and Customer Relationships
4.Progressive Environmental Stewardship
5.Technology and Innovation
Sustainability Governance
In order for an organization to truly integrate sustainability, it requires accountability at the Board and executive level. It requires an understanding of ESG issues and associated corporate actions to address these issues, while continuing to balance operations and growth.
Sustainability is overseen by TransAlta's Governance, Safety and Sustainability Committee (“GSSC”) of the Board. The GSSC assists the Board in fulfilling its oversight responsibilities with respect to the Corporation’s monitoring of environmental, health and safety regulations, public policy changes and the establishment and adherence to environmental, health and safety practices, procedures and policies. For additional details on our governance, please refer to the Governance and Risk Management section of this MD&A.
Sustainability Reporting: Disclosure Guidance and Materiality
The following outlines material environmental and social considerations in respect of our operated facilities.
Key elements of the following disclosure are guided by our sustainability materiality assessment. Our materiality assessment is developed through evaluation of key sector-specific research on materiality issues and supported by internal and external engagement on key sustainability issues. To provide context on how ESG affects our business (including material focus areas), our content is guided by leading ESG reporting frameworks, including the Global Reporting Initiative ("GRI"), Sustainability Accounting Standards Board ("SASB") and the Task Force on Climate-related Financial Disclosures ("TCFD"). We continue to increase our alignment with SASB and TCFD. Our ESG content is integrated within this MD&A. Content is structured using non-traditional capital (this includes natural, human, social and relationship, intellectual and manufactured capital) as per guidance from the International Integrated Reporting Framework. This approach ensures we inform investors on how management and performance on non-traditional capitals contribute to financial value.
Environmental and Social Risk and Materiality
Our materiality assessment informs our focus on major environmental and social risks. Our major environmental risk factors include weather, environmental disasters, climate change, exposure to the elements, environmental compliance risk, and current and emerging environmental regulation. Our major social risk factors include public health and safety, employee and contractor health and safety, local communities, employee retention, reputation management, and Indigenous and stakeholder relationships.
For further guidance on our risk factors, please refer to the Risk Management section of this MD&A.
TRANSALTA CORPORATION M75

Management’s Discussion and Analysis
Reliable, Low-Cost and Sustainable Energy Production:
Natural, Intellectual and Social Capital Management
Business and Economic Model Resilience
TransAlta has been powering economies and communities for over 109 years. Our mission is to provide safe, low-cost and reliable clean electricity to our customers. To achieve this goal, in today's evolving economy and increasingly electrified world, our strategy focuses on renewable electricity, natural gas and a deep commitment to sustainability. Our business model is primarily focused on providing power to industrial and commercial customers. This model has stood the test of time and we continue to focus our efforts on the customer and adapting to meet customer needs. As customers increasingly adopt ESG and sustainability goals, we are well positioned to support their sustainability objectives. We developed our first sustainability report in 1994. In the early 2000s, we were an early adopter of wind. Our expertise in renewable energy spans 109 years: we began hydro operations in the early 1900s and today we are a leading hydro and wind producer. We believe we are uniquely positioned as the world continues to electrify and adopt sustainability practices.
Brand Recognition
Our business resilience is enhanced by a purpose-based, long-term and sustainable business strategy: growth in renewable electricity and natural gas and a commitment to sustainability. TransAlta has operated power-generation assets for over 109 years, which reflects this approach to long-term and sustainable business practices. A long-term commitment to business and partnerships lends itself to goodwill and brand recognition, something we value and do not take for granted. We believe our low-cost and clean electricity strategy, supported by our internal values and sustainable approach to business, will help reinforce and continue to increase our positive brand recognition.
Intellectual Capital
At TransAlta, we define intellectual capital as our knowledge-based assets. Measuring these assets serves two purposes. First, we seek to understand them so we can improve their management and performance. Second, we seek to understand these assets to communicate their real value. The following highlights some of our knowledge-based assets, which we believe provide us with a competitive advantage and contribute to shareholder value.
Diversified Knowledge
The experience and acumen of our employees enhances our value creation. Our experience in developing and operating power-generation technologies extends to over 109 years, and many of our employees have worked with us for over 30 years. Our energy marketing business complements our knowledge of operating power-generation assets.
Our experience in developing and operating power-generation technologies is highlighted below:

Power-Generation Type | Operating Experience (years)
Hydro | 109
Natural Gas | 70
Coal | 70
Wind | 18
Solar | 5

For further details, please refer to Customers in this section of this MD&A.
TRANSALTA CORPORATION M76

Management’s Discussion and Analysis
Grid Resiliency
As a large electricity generator, we work diligently to ensure the power we provide our customers is reliable, affordable and has low environmental impact. We provide decentralized power solutions to industrial customers and we supply power to centralized power systems.
In all of the jurisdictions where we operate, we work closely with the system operators to ensure overall supply adequacy and reliability of the grid. In Alberta, where we are also a transmission facility owner, we own grid infrastructure that addresses system reliability. We consider a myriad of factors in our planning and operation decisions that could put grid resiliency at risk, including renewable energy intermittency, cyberattacks, extreme weather events and natural disasters.
One solution to support renewable energy intermittency includes investment in battery storage technology. Our first battery storage project began commercial operations in 2020. For more information, please refer to Renewable Energy and Battery Storage in our Natural Capital Management section of this MD&A. For more information on cyberattacks, please refer to Public Health and Safety in the Social and Relationship Capital section of this MD&A. For more information on extreme weather events and natural disasters, please refer to Weather in the Natural Capital Management section of this MD&A.
Customers
TransAlta serves industrial and commercial customers with power and energy services across its fleet in Canada, the US and Australia. As one of the largest electricity generators in Alberta, our team serves businesses with:
▪Energy consumption and cost management solutions;
▪Market price risk and volume exposure mitigation;
▪Sustainability initiatives such as self-generated electricity and environmental attributes such as EPCs; and
▪Monitoring of energy market design changes, price signals and applicable and available incentives.
The customer solutions team at TransAlta has maintained a large portfolio of customers in Alberta across a broad range of industry segments, including commercial real estate, municipal, manufacturing, industrial, hospitality, finance, and oil and gas. TransAlta is proud of the service we provide to our customers, which is evidenced by the achievement of over 90 per cent customer retention for the last three years.
Across our business in Canada, the US and Australia, we are focused on helping our customers achieve their sustainability goals. One example is through TransAlta’s fleet of on-site cogeneration facilities. Cogeneration is the process of generating electricity and steam simultaneously. When constructed on-site, the construction of additional transmission lines is not required, which avoids disruption to the environment. It also reduces the natural gas required for some industrial processes by using high-efficiency steam production rather than boilers. Examples of industrial processes that utilize cogeneration include gas processing, steam-assisted gravity drainage oil sands extraction, chemical manufacturing, and pulp and paper production. Cogeneration is recognized by regulatory bodies for its efficient generation of power when compared to other forms of natural gas power generation, and thus can potentially produce EPCs that can be used to satisfy our customers' regulatory obligations or sold for additional revenue.
We provide on-site generation for large mining and industrial customers. This requires us to be continually engaged with these customers ensuring that current electricity requirements are provided safely, reliably and cost-effectively with the benefit of lower GHG emissions.
Another way we contribute to our customers’ sustainability goals is through the development of renewable energy and the use of environmental attributes. We continue to develop renewable energy facilities to support customers achieving their sustainability goals and targets, such as 100 per cent renewable power targets and/or GHG reduction targets. Recent examples include our Skookumchuck wind project in Washington, which has a 137 MW capacity and is subject to a PPA with a single offtaker and our Big Level wind project in Pennsylvania, which has a 90 MW capacity and is subject to a PPA with Microsoft Corporation.
TRANSALTA CORPORATION M77

Management’s Discussion and Analysis
We have the ability to generate, trade, purchase and sell: EPCs; Alberta carbon offset credits; Renewable Energy Credits ("RECs"); and emission offsets. Alberta carbon offsets can be voluntarily generated by Alberta projects, which meet Alberta carbon offset system qualification protocols. Our Alberta wind facilities generate Alberta carbon offset credits or EPCs. EPCs are credits generated by regulated facilities that reduce GHG emissions below their specified reduction targets in the Alberta-based carbon market. RECs are produced from our renewable energy assets (wind, hydro and solar) and can be traded in voluntary carbon markets or sold to customers. RECs can be used to meet regulatory requirements when a target for renewable energy generation is set by a jurisdiction or can be used to voluntarily "green" electricity procurement. Emissions offsets are produced from voluntary projects that reduce emissions in sectors of the economy not covered by carbon reduction regulations. The optimization of environmental attributes can be used as a cost-effective way, for the Corporation or our customers, to lower compliance costs attributed to carbon policies or renewable portfolio standards, or utilized to achieve voluntary corporate sustainability or carbon reduction goals.
Energy Affordability
TransAlta focuses on assisting commercial and industrial customers in managing their cost of energy. TransAlta has a full suite of procurement strategies and products with various terms available to our customers to assist in understanding and reducing their energy costs.
For customers interested in making a long-term commitment to obtain predictable costs, TransAlta has the experience to develop cogeneration facilities or long-term offtake agreements from its existing and future gas fired and renewable facilities.
End-Use Efficiency and Demand
TransAlta’s commercial and industrial customers have access to an extensive set of monthly reports providing detailed tracking of customer usage, allowing for corrective action as required, as well as cost-saving recommendations.
Our Power Factor Report advises the customer of sites that operate at less than a 90 per cent power factor so they can consider installing energy-efficient equipment. By reducing the customer’s power system demand charge through power factor correction, the customer’s site puts less strain on the electricity grid and reduces its carbon footprint. TransAlta’s Site Health Report advises customers of a site whose peak demand has been permanently reduced for a variety of reasons from its initial in-service date. The customer may be paying a higher demand charge each month to the distribution company based on the original peak demand expected at the site. TransAlta collaborates with the customer and determines the new peak demand based on the customer’s operation. The customer, working with the distribution company, may find it economic to buy down the distribution contract to reduce the monthly distribution costs going forward.
TRANSALTA CORPORATION M78

Management’s Discussion and Analysis
Progressive Environmental Stewardship: Natural Capital Management
We continue to increase financial value from natural or environmental capital-related business activities, while minimizing our environmental footprint and potential risk factors related to environmental impacts. Comparable EBITDA from renewable energy generation in 2020 was $353 million (2019 - $341 million). Our revenue in 2020 from environmental attribute sales was $25 million (2019 - $28 million). In addition, in 2020 the sale of coal byproducts and waste-related recycling generated financial value in the range of $15 million to $20 million. This is lower than our range reported in 2019 of $25 million to $35 million due to our ongoing transition away from coal-fired generation.

The following are key trends in our natural capital: |
Year ended Dec. 31 | 2020 | 2019 | 2018
Renewable energy comparable EBITDA | 353 | 341 | 342
Environmental attribute sales revenue | 25 | 28 | 22
GHG emissions (million tonnes CO 2 e) | 16.4 | 20.6 | 20.8

Environmental Strategy
All energy sources used to generate electricity have some impact on the environment. While we are pursuing a business strategy that includes investing in renewable energy resources such as wind, hydro and solar, we also believe that natural gas will continue to play an important role in meeting energy needs as part of a clean electricity transition. Natural gas provides low-emission baseload and peaking generation to support system demands and intermittent renewable generation. TransAlta operates simple and combined-cycle natural gas units and cogeneration facilities. Since 2002, we have retired over 2,000 MW of coal and converted approximately 420 MW of coal to gas. Our conversion to gas transition is ongoing, and we plan to convert or repower Alberta coal units to natural gas in the 2020 to 2023 timeframe while retiring our Washington State coal facility by the end of 2025. In 2026, our generation mix will be made up of natural gas and renewable energy only.
Regardless of the fuel type, we place significant importance on environmental compliance and continued environmental impact mitigation, while seeking to deliver low-cost and reliable electricity. The Corporation strives to be environmentally responsible and recognizes that the competitive pressures for economic growth and cost efficiency must be integrated with sound sustainability management, including environmental stewardship.
We are subject to environmental laws and regulations that affect aspects of our operations, including air emissions, water quality, wastewater discharges and the generation, transport and disposal of waste and hazardous substances. The Corporation’s activities have the potential to damage natural habitat, impact vegetation and wildlife, or cause contamination to land or water that may require remediation under applicable laws and regulations. These laws and regulations require us to obtain and comply with a variety of environmental registrations, licenses, permits and other approvals. The environmental regulations in the jurisdictions in which we operate are robust. Both public officials and private individuals may seek to enforce environmental laws and regulations against the Corporation. We interact with a number of regulators on an ongoing basis, including but not limited to: Alberta Environment and Parks; Ministry of the Environment, Conservation and Parks in Ontario; Ministry of Natural Resources and Forestry in Ontario; Ministry of Forest Lands, Natural Resource Operations and Rural Development in British Colombia; Environment and Climate Change Canada; Fisheries and Oceans Canada; Michigan Department of Environment, Great Lakes, and Energy; Southwest Clean Air Agency in Washington; Washington State Department of Ecology; Washington State Department of Health; US Environmental Protection Agency (EPA); and the Department of Agriculture, Water and the Environment in Australia; and the Clean Energy Regulator in Australia.
Currently, the most material natural or environmental capital impacts to our business are GHG emissions, air emissions (pollutants, metals) and energy use. Other material impacts that we manage and track performance on via our environmental management systems include land use, water use and waste management.
Environmental Governance
The GSSC assists the Board in fulfilling its oversight responsibilities with respect to the Corporation’s monitoring of environmental, health and safety regulations, public policy changes, the establishment and adherence to environmental, health and safety practices, procedures and policies in response to legal/regulatory and industry compliance or best practices. The importance of environmental protection is outlined under our Total Safety Management Policy as a corporate responsibility for TransAlta, and the personal responsibility of each employee and contractor working on TransAlta's behalf. This policy is approved by our President and Chief Executive Officer ("CEO").
For more details on governance, please refer to the Governance and Risk Management section of this MD&A.
TRANSALTA CORPORATION M79

Management’s Discussion and Analysis
Environmental Management Systems
All of our 75 facilities have Environmental Management Systems (“EMS”) in place, the majority of which closely align with the internationally recognized ISO 14001 EMS standard. We have operated our facilities in line with ISO 14001 for over 20 years, and our systems and knowledge of management systems are therefore mature. Only two facilities do not have ISO 14001 aligned EMS in place, although these facilities do have a comparable EMS in place. This is due to commercial arrangements (TransAlta is not the operator of those two sites). Aligning with ISO 14001 provides assurance that our systems are designed to continuously improve performance.
Environmental Performance
Reducing the environmental impact of our activities benefits not only our operations and financial results, but also the communities in which we operate. We have a proactive approach to minimizing environmental risks and we anticipate this strategy will benefit our competitive position as stakeholders and society place an increasing emphasis on successful environmental management.
Renewable Energy and Battery Storage
Since 2005, we have added over 1,500 MW in renewable electricity capacity. We operate over 900 MW of hydro energy and our experience with hydro operations spans over 109 years. We were an early adopter of wind energy and today operate 1,500 MW of wind power. In 2015, we made our first solar investment in a 21 MW solar facility in Massachusetts, and we continue to look for opportunities to develop and operate solar energy. In 2020, we commissioned the first utility-scale battery storage project in Alberta, located at our Summerview II wind facility. The project uses Tesla battery technology and has a capacity of 10 MW.
Our production from renewable electricity in 2020 offset the equivalent of approximately 2.9 million tonnes of CO 2 e, or the removal of approximately 630,000 cars from North American roads. The estimated GHG offset is calculated using production data (MWh) from each renewable facility multiplied by the regional (provincial or state) grid emissions intensity. This supports our customers in achieving their renewable energy procurement and/or GHG emissions reduction goals. For more details on the types of environmental attributes we generate for customers, please refer to the Customers section of this MD&A.
Natural Gas
Natural gas plays an important role in the electricity sector, providing low-emission baseload and peaking generation to support system demands and intermittent renewable generation as part of a clean electricity transition. TransAlta operates simple-cycle, combined-cycle, and cogeneration facilities in Canada, the US and Australia. Natural gas facilities provide highly efficient electricity and, in the case of cogeneration, steam production, directly for customers and for the wholesale markets. TransAlta is a significant operator of natural gas electricity in Canada and Australia. We have started converting or repowering Alberta coal units to natural gas. We continue to see a role for natural gas in the future to support system demands and increasing demand for power from customers.
Coal Transition
Our conversion to gas transition plan in Alberta is expected to significantly reduce our environmental footprint. As a result of our coal retirements, conversion to gas and repowerings, our energy use, GHG emissions, air emissions, waste generation and water usage will significantly decline. Transitioning off coal will eliminate all of our mercury emissions, the majority of particulate matter and sulphur dioxide emissions ("SO 2"), as well as significantly reduce our NO x emissions. The coal retirements eliminate significant GHGs, and the conversion of our Alberta coal facilities to natural gas reduces GHG emissions by 40-60 per cent and supports system reliability, affordability and the growth of renewable electricity in Alberta. Our converted or repowered facilities will also use lower carbon natural gas, compared to facilities in other jurisdictions, as new methane reduction regulations in Alberta and Canada will reduce GHGs in the production and processing phase with respect to flaring and venting of methane (fugitive GHG emissions).
In 2020, TransAlta announced plans to fast-track away from coal mining and coal-fired power generation in Canada by the end of 2021. At our Centralia coal facility in Washington State, one unit was retired in 2020 and the second unit will retire by the end of 2025. In 2022, our coal capacity will be 670 MW, a significant reduction from coal capacity of approximately 5,000 MW in 2015. Coal will be entirely eliminated from our operations by the end of 2025.
TRANSALTA CORPORATION M80

Management’s Discussion and Analysis
Energy Use
TransAlta uses energy in a number of different ways. We burn gas, diesel and coal (to the end of 2021 in Canada and the end of 2025 at Centralia) to generate electricity. We harness the kinetic energy of water and wind to generate electricity. We also generate electricity from the sun. In addition to combustion of fuel sources, we also track combustion of gasoline or diesel in our vehicles and the electricity use and fuel use for heating (such as natural gas) in the buildings we occupy. Knowledge of how much energy we use allows us to optimize and create energy efficiencies. As an electricity generator, we continually and consistently look for ways to optimize and create efficiencies related to the use of energy. For example, in 2019, we supported a study conducted by Stanford University to understand how to improve wind production. The research showed that angling turbines slightly away from the wind can boost energy produced and even out variable supply.
The following table captures our energy use (millions of gigajoules). Energy use declined by 19 per cent in 2020 over 2019, primarily as a result of reduced coal use. Minor revisions were made to our energy use data in 2020 as a result of accrual adjustments from 2019 and 2018. Historical 2019 total energy use was revised from 345 million gigajoules to 346 million gigajoules as a result of these changes. Due to rounding, there was no impact to our reported 2018 total.

Year ended Dec. 31 | 2020 | 2019 | 2018
Hydro | — | — | — |
Wind & Solar | — | — | — |
North American Gas | 30 | 30 |  | 28 |
Australia Gas | 21 | 20 |  | 20 |
Alberta Thermal | 135 | 168 |  | 203
Centralia | 93 | 128 |  | 107 |
Corporate and Energy Marketing | — |  | — |  | — |
Total energy use (million gigajoules) | 279 | 346 | 358

Air Emissions
Our coal facilities emit air emissions that we track, analyze and report to regulatory bodies. We also work on mitigation solutions depending on the type of air emission. We report our major air emissions from coal, which includes NO x, SO 2, particulate matter and mercury. We will continue reducing air emissions in our existing fleet through our conversion and retirement of coal units in Alberta and Washington State. In 2020, we accelerated our target of 95 per cent SO 2 and 50 per cent NO x emission reductions over 2005 levels by moving the target date from 2030 to 2026. In addition, we increased the stringency of our reduction levels for NO x to 80 per cent. Since 2005, we have reduced SO 2 emissions by 83 per cent and NO x by 68 per cent. We continue to capture 80 per cent of mercury emissions at our coal facilities and, by the end of 2025, mercury emissions will be eliminated following the conversions to gas, Sundance Unit 5 repowering and the retirement of the Centralia facility. Particulate matter and SO 2 emissions will also be virtually eliminated or considered negligible.
None of our Alberta coal facilities are located within 50 kilometres of dense or urban populations, but our Centralia thermal facility in Washington State is 40 kilometres from a dense or urban population. As per guidance from SASB, “a facility is considered to be located near an area of dense population if it is located within 49 kilometres of an area of dense population” (being deemed to be a "minimum population of 50,000 persons"). The Centralia thermal facility has two units and we retired one unit in 2020 and will retire the additional unit by the end of 2025, at which time air emissions from our coal facilities will be eliminated.
Our gas facilities emit low levels of NO x that trigger reporting obligations to national regulatory bodies. These gas facilities also produce trace amounts of SO 2 and particulate matter, but at levels that are deemed negligible and do not trigger any reporting requirements or compliance issues. Many of our gas facilities are located in very remote and unpopulated regions, away from dense urban areas. Our Sarnia, Windsor, Ottawa and Fort Saskatchewan gas facilities are our only facilities with air emissions within 49 kilometres of dense or urban environments.
Our total air emissions in 2020 decreased compared with 2019 levels. Specifically, NO x was reduced 19 per cent, particulate matter was reduced 36 per cent and SO 2 was reduced 26 per cent over 2019 levels. Mercury emissions also decreased by 12 per cent over 2019 levels (which is not reflected in the table below due to rounding). Reductions in emissions were largely due to an increase in co-firing (gas and coal) at our Alberta thermal facilities and a reduction in production from our Centralia coal facility. Historical NO x incurred minor revisions in 2020 to include NO x emissions from our Highvale mine. The revision increased 2018 NO x from 28,000 to 29,000 tonnes. There was no change to reported 2019 tonnes as the revision was minor and, with rounding, the volume remains consistent.
TRANSALTA CORPORATION M81

Management’s Discussion and Analysis
The following table represents our material air emissions. Figures have been rounded to the nearest one thousand with the exception of mercury, which are rounded to the nearest ten as totals are considerably lower:

Year ended Dec. 31 | 2020 | 2019 | 2018
Sulphur dioxide (tonnes) | 12,000 |  | 16,000 |  | 19,000 |
Nitrogen oxides (tonnes) | 21,000 |  | 26,000 |  | 29,000 |
Particulate matter (tonnes) | 5,000 |  | 8,000 | 8,000 |
Mercury (kilograms) | 60 | 60 | 70

Water
Our principal water use is for cooling and steam generation in our coal and gas facilities but our hydro operations also require water flow for operations. Water for coal and gas operations is withdrawn primarily from rivers where we hold permits to withdraw water and must adhere to regulations on the quality of discharged water. The difference between withdrawal and discharge, representing consumption, is due to several factors, which include evaporation loss and steam production for customers. Typically, TransAlta withdraws in the range of 220-240 million m 3 of water across our fleet. In 2020, we withdrew approximately 240 million m 3 (2019 - 260 million m 3) and returned approximately 200 million m 3 (2019 - 220 million m 3) or 85 per cent. Overall, water consumption was approximately 40 million m 3 (2019 - 40 million m 3). Water withdrawal and consumption was lower in 2020 primarily due to decreased production from our Alberta thermal and Centralia thermal facilities.
Centralia 2019 water data were revised in 2020 as a result of identified discrepancies, which resulted in overreported raw water intake or water withdrawal for sustainability reporting. The issue was specific to 2019 data only. Water from our Centralia facility is also reported to the Department of Ecology (“DOE”) in Washington State. There were no issues with our data submitted to the DOE, as the information generated for sustainability reporting followed a separate data collection process. As a result, Centralia 2019 water withdrawal was revised from approximately 52 million m 3 to 26 million m 3. The Centralia business unit has performed a full review of its water reporting process and our corporate function will review its internal assurance process to support avoidance of any future reoccurrence of this event.
Our 2019 company-wide water withdrawal, total water consumption and water intensity were also revised as a result of this change. Overall water withdrawal reduced from approximately 290 million m 3 to 260 million m 3 (result of rounding), total water consumption reduced from 70 million m 3 to 40 million m 3 (result of rounding) and our company-wide water intensity reduced from 2.48 m 3/MWh to 1.55 m 3/MWh.
In 2020, we established a new water consumption reduction target to reduce fleet-wide water consumption (withdrawals minus discharge) by 20 million m 3 or 40 per cent in 2026 over a 2015 baseline. Water consumption in 2015 was 45 million m 3. This target is in line with the UN's Sustainable Development Goals ("SDGs"), specifically "Goal 6: Clean Water and Sanitation." Our water consumption will fluctuate somewhat over the period of 2020-2025 as we transition off coal, convert and repower gas facilities and ramp production upwards.
The following represents our total water consumption (million m 3) over the last three years. Figures below have been rounded to the nearest 10 million m 3:

Year ended Dec. 31 | 2020 | 2019 | 2018
Water withdrawal | 240 | 260 | 250
Water discharge | 200 | 220 | 210
Total water consumption (million m 3) | 40 | 40 | 40

Our largest water withdrawal and discharge occurs at our Sarnia gas cogeneration facility (which produces both electricity and steam for our customer). The facility operates as a once-through, non-contact cooling system for our steam turbines. Despite large withdrawals from the adjacent St. Clair River to support our Sarnia operations, we return approximately 93 per cent of the water withdrawn. Water from this source is currently at "low risk" as per analysis from the SASB-endorsed Aqueduct Water Risk Atlas tool.
TRANSALTA CORPORATION M82

Management’s Discussion and Analysis
The Aqueduct Water Risk Atlas tool highlights that water risk is high at our interior and southern Western Australia facilities due to high interannual variability in the region. Interannual variability refers to wider variations in regional water supply from year to year. Our water supply at these facilities is provided at no cost under PPAs with our mining customers, hence our risk is significantly mitigated. In addition, our customers have developed conservation and re-use strategies aimed at recycling water for mining operational needs. All water used in the region is sourced from scheme water, and with respect to gas and diesel turbine water use, water wash techniques and frequency of activities are continually modified to minimize consumption and environmental impact. Water used in our operations is returned to our customers, who repurpose this water for vegetation and dust suppression in their mining operations.
At the South Hedland facility in Western Australia, water risk is also high due to the risk of flooding in the region. The South Hedland facility was built above normal flood levels to mitigate potential risk from flooding. During a category 4 cyclone event in the area and associated flooding in the region in 2019, the South Hedland facility stayed dry and continued to generate power for the region. In addition, the South Hedland facility has developed a Water Efficiency Management Plan with Water Corporation WA, the principal supplier of water, wastewater and drainage services in Western Australia. Initiatives are aimed at reducing water consumption and costs through innovative technology and efficiencies identified through facility management.
In southern Alberta, our hydroelectric facilities have played an increasingly important water management role following the flood of 2013. In 2016, we signed a five-year agreement with the Government of Alberta to manage water on the Bow River at our Ghost Reservoir facility to aid in potential flood mitigation efforts, as well as at our Kananaskis Lakes System (which includes Interlakes, Pocaterra and Barrier) for drought mitigation efforts.
Waste
The importance of environmental protection and managing waste is outlined in our Total Safety Management Policy as a corporate responsibility for TransAlta, and a responsibility of each employee and contractor working on TransAlta's behalf. Our waste data is reported annually to a number of different regulatory bodies.
In 2020, our operations generated approximately 1.1 million tonnes equivalent of waste (2019 - 1.5 million tonnes). Of total waste generated, 98 per cent was non-hazardous waste and two per cent was hazardous waste. In 2020, only 0.1 per cent of total waste generated was directed to landfill. From the remaining 99.9 per cent, 45 per cent was returned to the mine (ash from coal combustion), 47 per cent was reused or sold to third parties, three per cent was recycled and five per cent was stored.
In 2020, we established a new waste reduction target that by 2022 TransAlta will reduce total waste generation by 80 per cent over a 2019 baseline of 1.5 million tonnes equivalent of waste generation. This is in line with the UN's SDGs, specifically, "Goal 12: Responsible Consumption and Production."
Our reuse waste or byproduct waste is generally sold to third parties. Byproduct sales and associated annual revenue generation typically ranges from $15 million to $20 million. Our operating teams are diligent at not only minimizing waste, but also maximizing recoverable value from waste. We have invested in equipment to capture byproducts from the combustion of coal, such as fly ash, bottom ash, gypsum and cenospheres, for subsequent sale. These non-hazardous materials add value to products like cement and asphalt, wallboard, paints and plastics.
Given our transition off coal, we will no longer produce fly ash waste in Canada past the end of 2021 and past the end of 2025 in the US. The Corporation is looking at recovering fly ash that was returned to its original source at Highvale mine to replace this supply, which is used extensively in the concrete industry. By turning the recovered product into something marketable, it will continue to aid in reducing the amount of cement produced and consequent emissions while offering new job and economic growth opportunities. This innovative technology contributes to a circular economy and will reduce reclamation liabilities for TransAlta.
TRANSALTA CORPORATION M83

Management’s Discussion and Analysis
Biodiversity
The importance of environmental protection and biodiversity is outlined in our Total Safety Management Policy as a corporate responsibility for TransAlta, and a responsibility of each employee and contractor working on TransAlta's behalf. We consider the biodiversity impact at all of our existing operations (with greater focus being given to mining operations) and the biodiversity impacts of all new growth projects are evaluated in line with regulatory compliance and with respect to TransAlta's focus on biodiversity, which is to support biodiversity health.
Growth
Each new TransAlta development project must complete an in-depth environmental assessment (as prescribed by the local regulation and in line with our own assessment practices) describing baseline environmental conditions, identifying potential effects and developing mitigation for identified environmental sensitivities prior to construction and operation. These assessments have been specifically designed to meet the environmental information requirements of the respective regions in which we operate while identifying alignment with the intent of the standards and/or regulations applicable to these jurisdictions (e.g., Wildlife Directive for Alberta Wind Energy Projects, US Fish & Wildlife Service Land-Based Wind Energy Guidelines, etc.). Typically, our renewable projects are greenfield development projects that require a higher level of evaluation compared to a number of our gas projects, which integrate into existing industrial facilities.
In addition, TransAlta provides a detailed wildlife mitigation plan to environmental regulators outlining specific measures that will be employed to mitigate the effects that project construction and operation activities may have on wildlife, wildlife habitat and specific wildlife features identified during environmental studies completed during the development stage.
Each greenfield development project has a detailed stakeholder consultation plan designed to ensure all potentially impacted host landowners, stakeholders, agencies, businesses, non-governmental organizations ("NGOs"), environmental NGOs and Indigenous communities understand the nature of the projects, have multiple and varied opportunities for engagement and feedback, and are able to engage in meaningful dialogue and discussion with TransAlta and its representatives. The ultimate goal is addressing, solving and mitigating stakeholder or Indigenous community biodiversity concerns before filing major permit applications for all of our projects.
Day-to-Day Operations
At our Alberta thermal operations, we have a Wildlife Monitoring Program designed to monitor wildlife abundance and species diversity in the study area over time. Based on these surveys, TransAlta has seen primarily stable or increasing biodiversity in the area, with various new bird species being detected over the years and incidents of vehicle collisions decreasing due to lower speed limit restrictions. Some animal population sizes fluctuate in the area based on weather conditions and available ground cover.
Our natural gas operations have a relatively limited impact on biodiversity. The facilities are frequently constructed adjacent to existing industrial operations, and TransAlta may not always be the holder of the environmental permits. The land area these facilities occupy is also generally relatively small. One exception is our Sarnia cogeneration facility. This facility is made up of 260 acres of brownfield industrial land, some of which contains areas with tall grasses and potential wildlife. Care will be taken at the time of redevelopment of this land to minimize impact to species at risk through the completion of species-at-risk surveys as well as performing certain construction activities outside of nesting periods. For all sites that are under our environmental scope, we adhere to all relevant environmental compliance permits.
At our hydro facilities, a major focus is on reducing the impact on fish and fish habitat. We adhere to provincial and federal regulations and operate in accordance to facility approvals. We continue to work towards operational improvement and regularly review our Environmental Operational Management Plans to ensure our operating parameters are met.
At our wind and solar operations, the business unit has established the WiSPER (Wind Stewardship Planning and Environmental Reporting) Program. The goal of the program is to provide continuous improvement and ongoing environmental monitoring programs beyond TransAlta’s regulatory requirements. This is achieved through periodic audit and inspection programs, and through collaboration with industry and the scientific community to address environmental concerns and impacts. An Operational Environmental Management Plan has been developed for each renewable asset to ensure that our facilities use environmentally sound and responsible practices that are based on a philosophy of continuous improvement of environmental protection through a program of inspection, monitoring and review.
TRANSALTA CORPORATION M84

Management’s Discussion and Analysis
Examples of WiSPER initiatives to support our biodiversity focus include our Avian Protection Program (installation of covers to protect birds from possible electrocution), a bird and bat mortality database (records all injuries and mortalities), environmentally sensitive resource monitoring (monitoring sensitive wildlife features in and around our operating wind facilities such as raptor nests and sharp-tailed grouse leks), long-term dataset collections (e.g., wildlife studies pre-construction and post-construction) and community wind education programs.
For further details on our environmental strategy, please refer to the Environmental Incidents and Spills discussion and the Land Use discussion of this MD&A.
Land Use
The largest land use associated with our operations is for surface mining of coal. Of the three mines we have operated, the Whitewood mine in Alberta is completely reclaimed and the land certification process is ongoing. Our Centralia mine in Washington State is currently in the reclamation phase and we have adopted a target to fully reclaim this mine by 2040.
Our Highvale mine in Alberta is actively mined with certain sections undergoing reclamation. The Highvale mine will close at the end of 2021 as part of discontinuing coal-fired power generation in Canada at the end of 2021. In 2020, our reclamation team updated our mine reclamation plans. The updated plans align with community priorities for the reclaimed land. These reclamation plans were submitted to the regulator and we are seeking approval on these plans. The regulator timeline for approval can be anywhere from one to three years. Our reclamation plans at Highvale are set out on a life-cycle basis and include contouring disturbed areas, re-establishing drainage, replacing topsoil and subsoil, re-vegetation and land management. Our mining practice incorporates progressive reclamation where the final end use of the land is considered at all stages of planning and development. Associated with our plans, we have recently announced a target to have the Highvale mine fully reclaimed by 2046.
In 2020, the Centralia mine planted 81,000 Douglas Fir trees on land that was reclaimed in previous years. However, further reclamation work at our Centralia was paused in 2020 due to the COVID-19 pandemic. At our Highvale mine, approximately 25 acres (10 hectares) were reclaimed in 2020.
Across our mining operations, to date we have reclaimed approximately 12,000 acres (4,800 hectares), which is approximately 38 per cent of land disturbed. Since 1991, we have planted approximately 2.5 million trees as part of this reclamation work.
Incidents and Spills
Protecting and minimizing our impact on the environment supports healthy ecosystems and mitigates our environmental compliance risk and reputational risk. We maintain procedures for environmental incidents similar to our safety practices, with tracking, analyzing and active management to minimize occurrences. With respect to biodiversity management (management of ecosystems, natural habitats and life in the areas we operate) we seek to establish robust environmental research and data collection to establish scientifically sound baselines of the natural environment around our facilities to ensure we can accurately evaluate the level of significance to biodiversity following an incident. We closely monitor the air, land, water and wildlife in these areas to identify and curtail potential impacts.
In 2020, environmental incidents were separated into two categories: significant environmental incidents and regulatory non-compliance environmental incidents. We define regulatory non-compliance environmental incidents as events involving a non-compliance event that did not have an impact on the environment. For example, a technical issue with a computer system for gathering real-time data could cause us to be out of compliance with local regulation or our EMS, but there is no direct consequence for the physical environment. All other events are captured as significant environmental incidents if there is some level of impact to the environment. In 2020, we recorded six significant environmental incidents (2019 - three incidents). Our six significant environmental incidents (all bird and bat strikes — further details below) will not cause any long-term impacts on the environment and the associated ecosystem and did not trigger any enforcement action. The Corporation is working to ensure our classification is accurate as a true significant environmental incident is one that causes harm to the environment and poses a long-term impact on a local ecosystem. In 2020 we note that we did not experience an incident with such an impact. We recorded two regulatory non-compliance environmental incidents in 2020 (2019 – six incidents). Both of these incidents occurred at our Sarnia facility and were related to an exceedance of discharge from our sumps during water treatment. Both incidents had negligible environmental impact.
Our six significant environmental incidents in 2020 occurred at our Summerview (Alberta), Antrim (New Hampshire) and Big Level (Pennsylvania) wind facilities. Four New Hampshire state-listed bat carcasses were found during the post-construction biological survey in Antrim (three little brown bats and one eastern small-footed bat). One Pennsylvania state-listed bird (yellow-bellied flycatcher) was found during the post-construction biological survey at Big Level. A ferruginous hawk, a listed species in Alberta, was found during an ongoing inspection during normal operation. In each
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case, root cause analysis investigations were performed, and we found no causal factors or root causes related to human behaviour or equipment failure being involved in the incidents. For all incidents, we collaborated with authorities and there were no enforcement actions with respect to the mortalities. Despite inconclusive findings, smart bat curtailment optimization is contemplated in Antrim and the biological monitoring studies continues at relevant sites.

Significant environmental incidents by business segment follow: |  |  |
Year ended Dec. 31 | 2020 | 2019 | 2018
Hydro | — | — | — |
Wind & Solar | 6 | 3 | — |
North American Gas | — | — |  | — |
Australia Gas | — | — |  | — |
Alberta Thermal | — | — |  | 1
Centralia | — | — |  | — |
Corporate and Energy Marketing | — | — | —
Total significant environmental incidents | 6 | 3 | 1

Regulatory non-compliance environmental incidents by business segment follow:
Year ended Dec. 31 | 2020 | 2019 | 2018
Hydro | — | — |  | — |
Wind & Solar | — | 1 | — |
North American Gas | 2 | 2 |  | 2 |
Australia Gas | — | — |  | — |
Alberta Thermal | — | 2 |  | 2
Centralia | — | 1 |  | 2 |
Corporate and Energy Marketing | — | — |  | —
Total regulatory non-compliance environmental incidents | 2 | 6 | 6

Some examples of mitigation measures TransAlta has taken include:
▪Installation of artificial nest platforms to increase breeding opportunities for endangered ferruginous hawks in southern Alberta;
▪Installation of bluebird nest boxes to increase breeding habitat for this sensitive species found at some of our southern Alberta wind facilities;
▪Bobolink Management Plan at the Wolfe Island wind facility – creation of 50 acres of breeding habitat for bobolink (a sensitive bird species in Ontario) to offset the potential impacts of the Wolfe Island wind facility on this species; and
▪Implementing operational bat curtailment at the Antrim, Big Level, Summerview and Kent Breeze wind facilities during the fall bat migration period (July to September) to reduce bat mortality at these sites by increasing the cut-in speed.
For 2021, we are removing our target for environmental incidents. This is because we do not tend to experience environmental incidents that have a large or lasting impact on the environment and an ecosystem, and we believe it is prudent to instead focus on other environmental areas that are more material for the Corporation. This will not change our internal focus on mitigation of environmental incidents. We continue to track and manage all environmental incidents, including all non-reportable (minor) environmental incidents, which helps us identify what causes an incident. Understanding the root cause of incidents helps with incident prevention planning and education.
Regarding spills and releases, typical spills that could occur at our operation sites are hydrocarbon-based. Spills generally happen in low environmental impact areas and are almost always contained and fully recovered. It is extremely rare for large spills to occur. Efforts are placed on providing a quick response to all spills to ensure assessment, containment and recovery of spilled materials result in minimal risk to the environment.
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There is a potential that ash ponds associated with our coal facilities could fail. The probability of this occurring is low, but the impact could be significant. We follow applicable environmental regulations with respect to our ash ponds and satisfy ourselves that management is adequate given the robust regulations in the jurisdictions where we operate. Management includes periodic inspections and appropriate mitigation if issues are uncovered. An inspection in 2020 noted cracks in one of our ponds. In response, a restoration plan was developed to fix the issue. The total cost of mitigation was $1 million.
The estimated volume of spills in 2020 was 4 m 3 (2019 - 530 m 3). Spill volumes in 2019 were higher due to a 527 m 3 spill at our Sarnia cogeneration facility. This was not a traditional product spill and was a wastewater effluent limit exceedance from a sump. There was no enforcement action associated with this spill.
Weather
Abnormal weather events can impact our operations and give rise to risks. Due to the nature of our business, our earnings are sensitive to weather variations from period to period. Variations in winter weather affect the demand for electrical heating requirements. Variations in summer weather affect the demand for electrical cooling requirements. These variations in demand translate into spot market price volatility. Variations in precipitation also affect water supplies, which in turn affect our hydroelectric assets. Also, variations in sunlight conditions can have an effect on energy production levels from our solar facility. Variations in weather may be impacted by climate change resulting in sustained higher temperatures and rising sea levels, which could have an impact on our generating assets. Ice can accumulate on wind turbine blades in the winter months. The accumulation of ice on wind turbine blades depends on a number of factors, including temperature and ambient humidity. Accumulated ice can have a significant impact on energy yields and could result in the wind turbine experiencing more downtime. Extreme cold temperatures can also impact the ability of wind turbines to operate effectively and this could result in more downtime and reduced production. In addition, climate change could result in increased variability to our water and wind resources.
Our generation facilities and their operations are exposed to potential damage and partial or complete loss resulting from environmental disasters (e.g., floods, high winds, fires and earthquakes), equipment failures and other events beyond our control. Climate change can increase the frequency and severity of these extreme weather events. The occurrence of a significant event that disrupts the operation or ability of the generation facilities to produce or sell power for an extended period, including events that preclude existing customers from purchasing electricity, could have a material adverse effect. Our generation facilities could be exposed to effects of severe weather conditions, natural or man-made disasters and other potentially catastrophic events such as a major accident or incident at our sites. In certain cases, there is the potential that some events may not excuse us from performing our obligations pursuant to agreements with third parties. The fact that several of our generation facilities are located in remote areas may make access for repair of damage difficult. Please refer to the Governance and Risk Management section of this MD&A for further discussion on weather-related risks.
During the past three years, we have experienced no significant impacts to annual financial results due to deviations from expected weather patterns.
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Management’s Discussion and Analysis
Progressive Environmental Stewardship: Climate Change Management
We believe in open and transparent reporting on material impacts relating to climate change. Our climate change reporting is structured as per guidance from the Financial Stability Board's TCFD recommendations. The following highlights our management, performance and leadership of impacts related to climate change.
TransAlta Climate Change Action - Highlights
▪The GSSC includes in its mandate that it will review guidelines and practices relating to environmental protection and the Corporation's plans with respect to environmental impact;
▪Our strategy involves moving away from GHG-intensive coal and achieving a 100 per cent mix of renewables and natural gas by the end of 2025;
▪Our business is showing resilience to mitigation of global warming by reducing GHG emissions — we have a target to reduce annual emissions by 19.7 million tonnes of CO 2 e by 2030 over 2015 levels and a new goal to be carbon neutral by 2050. Since 2015, we have reduced our annual emissions by 15.8 million tonnes of CO 2 e or approximately 80 per cent of required GHG reductions to meet this target;
▪We have reduced our annual emissions by approximately 25 million tonnes of CO 2 e since 2005, which is a 61 per cent reduction over the time period and highlights our decarbonization track record - this is the equivalent annual GHG emissions of a small country;
▪As a leader in North American renewable energy, and on-site generation development and production, we are well positioned to build renewable energy facilities and lower-carbon gas facilities to support customer sustainability goals to decarbonize; and
▪In 2020, CDP (the global disclosure system for environmental impacts known formerly as Carbon Disclosure Project) recognized TransAlta with an A- score, ranking the Corporation among industry leaders on climate change management.
Climate Change Governance
The highest level of oversight on business impacts related to climate change is at our Board level, specifically by the GSSC and the AFRC. Macro issues and opportunities such as coal GHG emissions and the phase-out of coal power generation, cost-competitiveness of renewable energy and customer preferences toward lower carbon energy have been at the forefront of strategic discussions with our executive and Board. These deliberations resulted in our actions to move away from coal, establish 2030 and 2050 GHG emissions reduction targets and grow our generation capacity with renewable energy and gas.
The GSSC has oversight of climate-related issues. Meeting on a quarterly basis, the GSSC's charter includes "monitoring and assessing climate change risks and compliance with associated legislation and public reporting." The charter also directs that the GSSC "at least annually, review guidelines and practices relating to environmental protection, including the mitigation of pollution and climate change; consider whether TransAlta’s policies and practices relating to the environment are being effectively implemented, and discuss and advise regarding the development of policies and practices regarding climate change, greenhouse gas and other pollutants."
In addition to the GSSC, climate risks are reviewed through the AFRC. For example, climate policy considerations are factored into decision-making with respect to conversion of coal facilities to gas facilities. In addition, many of our new projects, including clean energy projects, are reviewed by other committees of the Board and climate risk and opportunity is factored into those committee deliberations. As a result, climate change related capital expenditures, acquisitions and budgets are also reviewed at the Board level on a case-by-case basis.
Notably, five of our Board members have identified Environment and Climate Change as being among their top four relevant competencies. We have noted this in our skills matrix section of our 2020 Management Proxy Circular on page 33.
The highest level of oversight on climate change at our executive level is with the President and CEO. Climate change related risks are monitored and actively managed through our TransAlta-wide risk management processes. Climate change risks and opportunities are identified and reviewed at the Board level and all levels of the Corporation. The business units and corporate functions work closely together and flow risks and opportunities upwards to the executive and the Board. Risks and opportunities are reviewed by our CEO and executive team quarterly and are reported to the GSSC and the AFRC.
A significant component of executive compensation is tied to achieving our strategic goals, which include growing renewable energy, reducing GHG emissions through our conversion to gas transition and supporting our customer sustainability goals to decarbonize through on-site low carbon generation. Our corporate executive annual incentive plans (short-term incentive or annual bonus and long-term share incentives) are linked to TransAlta's performance (i.e.,
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"pay for performance"). These incentives are linked to execution of strategic goals and our compensation philosophy is designed to drive the right actions to achieve our strategic goals. The long-term incentive plan for the period 2018 to 2020 included a strategic goal to Transition to Renewable Energy. This goal was measured against the performance of the Corporation, which included: advancing and executing our conversion to gas (which results in significant GHG reductions); deliver growth in our renewables fleet (zero or very low carbon assets); expand our presence in the US renewables market (zero or very low carbon assets); advance and grow our on-site generation and cogeneration business (decentralized and low carbon/high energy-efficiency assets); continue to improve our already strong financial position; and remain disciplined with our capital investment strategy. As such, our incentive program is tied to reducing GHG emissions and climate change management.
Climate Change Strategy
TransAlta, and the electricity sector in general, are at the forefront of reducing GHG emissions, pursuing innovative lower-carbon and zero-carbon solutions (e.g., renewable energy, natural gas, distributed power generation, energy storage, etc.) and are showing a path to resiliency in a low-carbon world. Our investments and growth in renewable energy are highlighted by our diverse portfolio of renewable energy-generating assets. We currently operate approximately 2,500 MW of hydro, wind and solar power. In 2020, we completed construction and commercial operation of an additional 136 MW (net 67 MW) of wind generation in the US (2019 - 119 MW). Today, our diversified renewable fleet makes us one of the largest renewable producers in North America, one of the largest producers of wind power in Canada and the largest producer of hydro power in Alberta.
In addition to climate resiliency, TransAlta remains focused on reliability of electricity supply and affordability for customers. To support our own path to reduce our GHG footprint and ensure climate resiliency, we have a corporate goal to reduce our GHG emissions by 60 per cent by 2030 over 2015 levels, while growing renewable energy and natural gas. We believe natural gas plays a strong role in supporting grid reliability and supporting customer goals of affordability. In 2021, we have adopted a target to be carbon neutral by 2050. We believe carbon neutrality provides flexibility as we shape our strategy over the coming decades and we believe our clean electricity strategy has us well positioned to support us achieving this.
In 2021, we are conducting scenario analysis to further inform our understanding of risks, opportunities, technologies and pathways with respect to a number of future climate scenarios. This process will help inform us as we evaluate strategic GHG reduction pathways with respect to achieving our target of carbon neutrality by 2050. This target aligns us with efforts in the countries where we operate and broader global efforts under the Paris Agreement.
All our business units and operations consistently seek energy-efficiency improvements, opportunities to integrate clean combustion technologies and development of emissions offset portfolios to achieve emissions reductions at competitive costs. We seek investment in climate change related mitigation solutions, such as renewable energy development, where we can maximize value creation for our shareholders, local communities and the environment. Conversion of our large coal fleet to gas-fired generation highlights this approach, which will allow us to run our assets longer than the federally mandated coal retirement schedule. Our goals for undertaking such actions are to enhance value for our shareholders, ensure low-cost and reliable power, and reduce our GHG footprint.
With respect to our customers, we note that we are shifting our product offering from a GHG-intensive product to a low-carbon product to meet the need to decarbonize and mitigate associated societal risks, but also to meet the changing goals of our customers. We continue to build renewable projects for customers seeking to meet their own sustainability goals, such as carbon neutrality on Scope 2, RE100 goals or net zero. We continue to support customers with on-site power-generation goals, where collectively there is an opportunity to reduce GHG impacts through on-site cogeneration, where power and steam production replace existing higher GHG-intensive boilers. Our conversion of coal facilities to gas will significantly reduce the GHG intensity of the Alberta grid, supporting Scope 2 emission reductions for our customers and Alberta commercial and industrial loads.
Another way we can contribute to our customers’ sustainability goals is through the use of environmental attributes. We have the ability to generate, trade, purchase and sell environmental attributes that include Alberta EPCs, Alberta carbon offsets, RECs and emission offsets. Production from renewable electricity in 2020 resulted in avoidance of approximately 2.9 million tonnes of CO 2 e for our customers, which is equivalent to removing over 630,000 vehicles from North American roads over the same year. As previously noted, we seek to commoditize carbon through trading and the generation and sale of environmental attributes from renewable energy. Annual revenue generation from the sale of environmental attributes (Alberta carbon offsets and RECs) in 2020 was $25 million.
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Climate Change Risk Management
Climate change risks are monitored and actively managed through our TransAlta-wide risk management processes. Although we do not have a formal process to review specific climate change risk, climate change risks and opportunities are identified at the Board level, executive and management level, business unit level (coal, gas, wind, solar and hydro) and through our corporate function (e.g., government relations, regulatory, emissions trading, sustainability, commercial, customer relations and investor relations). The business units and corporate functions work closely together and provide information on risks and opportunities to management, the executive team and the Board. One area that is constantly monitored is climate policy, including the impacts on cost, growth and compliance.
Climate change risks at the asset or business unit level are identified through our EMS, asset management function and systems, our energy and trading business, active monitoring, active participation/communication with stakeholders, liaison with our corporate function, active participation in working groups and more. All identified material risks are added to our Enterprise Risk Management risk register. These risks are assessed and scored based on likelihood and impact (what could have "substantive financial impact," "strategic impact," "stakeholder or reputational impact" or "environment, health and safety impact"). Risks are not considered in isolation. Major risks are the focus of management response and mitigation plans.
Our climate change risks are divided into two major categories as per guidance from the TCFD, which include: (1) risks related to the transition to a lower-carbon economy and (2) risks related to the physical impacts of climate change.
1. Transition Risks to a Lower-Carbon Economy
We seek to understand the impact on our business as the world shifts to a lower-carbon society. We participate in ongoing decisions related to climate policy and regulation.
Policy and Legal Risks
Ongoing and Recently Passed Environmental Legislation
Changes in current environmental legislation do have, and will continue to have, an impact upon our operations and our business. For further details, please refer to the Governance and Risk Management section of this MD&A.
Canadian Federal Government
Federal Climate Plan
On Dec. 11, 2020, the Government of Canada released its “A Healthy Environment and a Healthy Economy” climate plan that outlines how the federal government intends to use policies, regulations and funding to achieve Canada’s Paris Agreement emission reduction target of 30 per cent reduction from 2005 greenhouse gas emission levels. The three major aspects of the plan include increased carbon prices and obligations, increased funding for clean technology and the implementation of the Clean Fuel Regulation ("CFR"). The government stated that it will consult with provinces and industry regarding many elements of the plan so significant uncertainty remains regarding the final form of the related regulations and other initiatives.
Key proposed elements of the federal plan:
▪Carbon price for the carbon tax and the larger emitters program is to rise $15 per tonne CO 2 e per year from 2023 until reaching $170 per tonne by 2030;
▪Carbon obligations to rise as performance standards (benchmarks) under large emitter regulations tighten;
▪Over $10 billion of funding will be made available for the energy transition, including support for electric vehicles and clean energy development to battery storage and improved grid technology; and
▪Implementation of the CFR on liquid fuels, but no CFR obligations for gaseous and solid fuels.
TransAlta intends to continue to engage with governments to mitigate risks and identify opportunities within the new federal plan.
Clean Fuel Regulation
In 2016, the Canadian federal government announced plans to consult on the development of a CFR to reduce Canada’s GHGs through the increased use of lower carbon fuels, energy sources and technologies. The objective of the regulation is to achieve 30 million metric tonnes of annual reductions in GHG emissions by 2030.
On Dec. 19, 2020, the Canadian federal government published its draft version of the CFR with the accompanying supporting documents. As a result of gaseous fuels no longer being regulated by the CFR, the CFR will have a limited impact on the electricity sector. Consultation on the regulation will conclude on March 4, 2021. The CFR is scheduled to be finalized in December 2021 and come into force on Dec. 1, 2022.
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Federal Carbon Pricing on GHGs
On June 21, 2018, the Canadian federal Greenhouse Gas Pollution Pricing Act ("GGPPA") came into force. Under the GGPPA, the federal government implemented a national price on GHG emissions. On Jan. 1, 2019, the GGPPA's backstop mechanisms came into force in provinces and territories that did not have an independent carbon pricing program or where the existing program was not deemed equivalent to the federal system. The backstop mechanism has two components: a carbon levy for small emitters ("Carbon Tax") and regulation for large emitters called the Output-Based Pricing Standard ("OBPS"). The Carbon Tax sets a carbon price per tonne of GHG emissions related to transportation fuels, heating fuels and other small emission sources.
As noted above, in the "Healthy Environment and a Healthy Economy" plan, the federal government proposed escalating the national price on carbon by $15 per tonne each year from 2023 until it reaches $170 per tonne in 2030.
The OBPS regulates large emitters' carbon intensity by setting a sectoral benchmark of GHG emissions per unit of production (e.g., tonnes CO 2 e/MWh) for electricity generators. Emitters exceeding the benchmark generate carbon obligations and those emitters that perform below the benchmark generate EPCs. Emitters can meet their obligations by reducing their emission intensity, buying carbon credits from others (offsets or EPCs) or making compliance payments to the government.
As discussed in the provincial sections below, the OBPS does not apply in Alberta and Ontario is in the process of transitioning out of the OBPS and into a provincial industrial carbon pricing system. As a result, TransAlta's Canadian thermal fleet will be regulated by provincial systems moving forward. However, the federal government compares provincial carbon pricing systems against the OBPS when deciding whether provinces have achieved equivalency with the federal government's carbon price under the GGPPA. On Feb. 12, 2021, the federal government began planning for a 2022 review of the OBPS and other aspects of the GGPPA. TransAlta will actively engage in this process as any changes to the OBPS will influence provincial carbon pricing systems in the future.
Gas Regulation
On Dec. 18, 2018, the federal government published the Regulations Limiting Carbon Dioxide Emissions from Natural Gas-fired Generation of Electricity. Under the regulations, new and significantly modified natural-gas-fired electricity facilities with a capacity greater than 150 MW must meet a standard of 420 tonnes CO 2 e/GWh to operate. For units with a capacity between 25 MW and 150 MW, their standard was set at 550 tonnes CO 2 e/GWh. Facilities with a capacity less than 25 MW have no standard.
Under the regulations, conversions to gas will also eventually have to meet a standard of 420 tonnes CO 2 e/GWh. If the first-year performance test after conversion meets certain emission standards it will not have to meet the 420 tonnes CO 2 e/GWh standard for several additional years past the end of its useful life.
As part of the Healthy Environment and a Healthy Economy Plan, the federal government signalled an interest in exploring a new emissions performance standard for the Canadian electricity sector. There are few details available regarding the potential new standard and TransAlta is engaging the federal government to understand the intent of the proposal.
Coal Regulation
On Dec. 18, 2018, amendments to the Reduction of Carbon Dioxide Emissions from Coal-Fired Generation of Electricity Regulations came into force under the Canadian Environmental Protection Act, 1999. The amended regulations will require coal units to meet an emission level of 420 tonnes CO 2 e/GWh by the earlier of end-of-life under the 2012 regulations or Dec. 31, 2029.
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Alberta
Large Emitter Greenhouse Gas Regulations
On Jan. 1, 2020, the Government of Alberta replaced the previous Carbon Competitiveness Incentive Regulation ("CCIR") with a new regulation called the Technology Innovation and Emissions Reduction ("TIER") Regulation. For the electricity sector, there were negligible changes between CCIR and TIER with renewable facilities continuing to receive crediting. The carbon price for TIER in 2021 will be $40/tonnes CO 2 e aligned with the GGPPA requirements. The performance standard benchmark remained at 0.370 tonnes CO 2 e/MWh. A review of TIER is not expected until 2023.
Facilities with emissions above the set benchmark comply with TIER by: a) paying into the TIER Fund (a government-controlled fund that invests in emissions reduction in the province) at the current carbon price; b) making reductions at their facility; c) remitting EPCs from other facilities; or d) remitting emission offset credits.
As required by the GGPPA, the Alberta government files annual reports on TIER program details with the federal government. The federal government reviewed TIER and found it compliant with the GGPPA for 2021. The Corporation will continue to receive offsets and EPCs for its renewable facilities under TIER, ensuring expected revenues are realized.
British Columbia
Beginning April 1, 2018, the British Columbia government increased its carbon tax price to $35 per tonne CO 2 e and committed to raise the price $5 per year until it reaches $50 per tonne in 2021. Upon review, the government has determined that the carbon tax rate will remain at its current level of $40 per tonne CO 2 e until April 2021, when it will increase from $40 to $45 per tonne CO 2 e. The carbon tax will increase to $50 per tonne CO 2 e in April 2022. The tax has a negligible cost impact for the Corporation as the tax applies primarily to our transportation fuel use, which is negligible in BC.
Ontario
Large Emitter Greenhouse Gas Regulations
On July 4, 2019, the Government of Ontario released its final regulations for the provincial Greenhouse Gas Emissions Performance Standards ("EPS"). On Sept. 21, 2020, the federal government accepted the Ontario government's EPS as meeting the requirements of the GGPPA. In December 2020, the Ontario government published amendments to align the EPS with the GGPPA requirements. The Ontario government also announced its intention to transition from the OBPS to the EPS starting on Jan. 1, 2021. Therefore, Ontario's large emitters were covered by the OBPS for 2019 and 2020 compliance years and will subsequently be covered by the EPS.
This requires TransAlta's Ontario natural-gas-fired assets to track and make compliance filings annually and to meet the carbon emission obligations of the applicable government. There are minor differences between the EPS and OBPS. Compliance requirements will be met through payments and alternative compliance units under the OBPS and EPS. However, change-of-law provisions in the contracts with Sarnia, Windsor and Ottawa allow TransAlta to flow carbon-regulation-related costs to customers, resulting in negligible cost increases to the Corporation.
Michigan
Michigan has air permit requirements related to the Clean Air Interstate Regulation with respect to NO x and SO 2 emissions. There are currently no GHG emission compliance requirements other than to report these emissions annually. The Ada cogeneration facility is in compliance with all environment requirements and there have been no recent changes to regulations that would increase costs at the facility.
Washington
In 2010, the Washington Governor's office and State Department of Ecology negotiated agreements with TransAlta related to the operation of Centralia’s two coal-fired electricity generating units. TransAlta agreed to retire its two Centralia coal units: one in 2020 and the other in 2025. This agreement is formally part of the state’s climate change program. We currently believe that there will be no additional GHG emissions regulatory burden on Centralia given these commitments. The related TransAlta Energy Transition Bill was signed into law in 2011 and provides a framework to transition from coal to other forms of generation in the State of Washington.
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Massachusetts
The Solar Renewable Electricity Credit I ("SREC I") program carved out from Massachusetts’ Renewable Portfolio Standard ("RPS") an initial quantity of 400 MW from small solar facilities of 10 MW or less. The initial SREC I program size was expanded and replaced by a lower-valued SREC II program. In 2018, the solar incentive program evolved into the current Solar Massachusetts Renewable Target Program that further reduced the incentive levels.
The initial SREC I program’s volume target was achieved, and qualified projects under SREC I continue to generate SREC I credits for their first 10 years post-commercial operation date. SREC I facilities then generate Class 1 RECs under the Massachusetts RPS for the remainder of their operational life.
Under Massachusetts' net metering program, qualified facilities connect with the local utility and generate net metering credits. Net metering credits offset the delivery, supply and customer charges and can be sold to customers from remote or on-site qualifying facilities. In 2016, the net metering program was updated to reduce the value of the net metering credits by reducing the offset to only energy costs. New projects are impacted once the net metering program volume reaches 1,600 MW. Existing facilities were grandfathered and continue to receive the full, original cost offset treatment for a period of 25 years from initial commercial operation.
Le Nordais receives value from the sale of RECs into the New England RPS markets. Massachusetts has proposed a lower compliance cost ceiling on its RPS standard that would effectively cap the value of RECs. This could have a negative impact on Le Nordais' REC sales price. The change in regulation is still being considered and has not yet been put into force.
Australia
On Dec. 13, 2014, the Australian government enacted legislation to implement the Emissions Reduction Fund (the "ERF"). The AU$2.55-billion ERF is the centrepiece of the Australian government's policy and provides a policy framework to cut emissions by five per cent below 2000 levels by 2020 and 26 to 28 per cent below 2005 emissions by 2030. The ERF's safeguard mechanism, commencing from July 1, 2016, is designed to ensure emissions reductions purchased by the Australian government through the ERF are not displaced by significant increases in emissions elsewhere in the economy. The ERF and its safeguard mechanism provide incentives to reduce emissions across the Australian economy.
In addition, on June 23, 2015, the federal Australian government also reformed the Renewable Energy Target ("RET") scheme. The RET is designed to add at least 33,000 GWh/year of renewable sources by 2020. The Australian government has advised there are now sufficient projects approved to meet and exceed the 2020 target of 33,000 GWh/year of additional renewable electricity. The annual target will remain at 33,000 gigawatt hours until the scheme ends in 2030. This would result in approximately 23.5 per cent of Australia's electricity generation being sourced from renewable projects.
The ERF is not expected to have a material impact on our Australian assets. In Australia, electricity has a single sectoral baseline applied to all electricity generators' emissions for units connected to one of Australia's five main electricity grids. The electricity sector baseline has been set at 198 million tonnes CO 2 e per year. In the most recent high emission years of 2015-2016, total emissions were 179 million tonnes CO 2 e per year.
If the baseline is exceeded, then all large emitter generation facilities will need to comply with individual facility baselines. The electricity sector should never exceed the sectoral emission target as no new coal generation is to be built and older coal facilities are retiring. The Corporation's gas facilities will not be subject to carbon costs under current regulations unless changes are made.
Technology Risks
Our conversion to gas strategy uses existing infrastructure and applicable technologies (natural gas turbines), which reduce the cost and GHG emissions related to new generation construction and material procurement.
Behind-the-fence generation and energy storage technology are emerging risks to the large-scale power-generation model. However, they are practical solutions for some customers, and TransAlta provides these technologies in addition to providing services to the grid.
We provide behind-the-fence generation or decentralized power to some of our industrial customers to supply on-site electricity generation. This generally can be in the form of a cogeneration system that provides steam for industrial processes in addition to power, or a renewable power system. These systems can either be tied to the grid or independent.
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Management’s Discussion and Analysis
Battery storage has the ability to enable greater adoption of renewables and motivate a shift to a distributed power-generation model. We continue to evaluate battery storage for its financial viability, while monitoring the potential impact battery technology could have on natural gas power generation. TransAlta began commercial operations of Alberta’s first utility-scale lithium-ion battery storage facility, called WindCharger, on Oct. 15, 2020. This project is unique as it uses TransAlta’s existing Summerview II wind facility to charge the battery, allowing WindCharger to be a truly renewable battery energy storage system. The project uses Tesla technology and the potential exists for the expansion of this technology. We are investigating the viability of battery storage at our various wind facility locations and for use in developing customer-specific energy supply solutions.
We have demonstrated upside in growing renewables and gas-powered generation. From 2000 to 2020, we have grown renewables capacity from approximately 900 MW to over 2,500 MW.
Market Risks
TransAlta has taken significant steps since 2005 to reduce its GHG impact and has announced a full transition off coal by the end of 2025. TransAlta continues to operate hydro facilities and invest in, develop and construct on-site natural gas facilities for customers and new renewable energy from wind, solar, and battery technology.
Changing customer behaviour, reduced consumption and associated use of electricity could impact the demand for electricity; however, we believe this risk is mitigated somewhat by the global trend toward electrification of the economy. Our low-carbon business model supports this type of future.
Increased costs for natural gas supply due to carbon pricing can impact our operating costs. Further discussion can be found in the Governance and Risk Management section of this MD&A. Use of renewable resources, such as the wind and sun, remove associated risk related to cost of supply.
Our Corporate function applies regionally specific carbon pricing, both current and anticipated, as a mechanism to manage future risks pertaining to uncertainty in the carbon market and as a safeguard to anticipate future impacts of regulatory changes on facilities. This information is directed to the business unit level for further integration. Identified climate change risks or opportunities and carbon pricing are recognized in the annual TransAlta long- and medium-range forecasting processes. We capture economic profit through generation of environmental attributes (such as carbon offsets and RECs) and through our emission trading function, which seeks to commoditize and profit from carbon trading.
Reputation Risks
Consumer trends appear to be moving in favour of renewable and cleaner electricity. We are invested in a diversified mix of renewable generation as well as natural gas, as it provides vital support to the electricity system.
2. Physical Impact Risks of Climate Change
As we learn more about the physical risks associated with climate change and weather, we continue to consider both acute and chronic risk, which could materially impact value creation from our operations.
Acute Risks
We are continuing to evaluate the potential impact of an acute climate change related impact to our business and/or an operational facility or facilities. Our facilities, construction projects and operations are exposed to potential interruption and damage or partial or full loss resulting from environmental disasters (e.g., floods, high winds, fires, ice storms, earthquakes and public health crises, such as pandemics and epidemics). Climate change can increase the frequency and severity of extreme weather events. Further impacts of extreme weather and climate change could result in social unrest, war or terrorism. There can be no assurance that in the event of an earthquake, hurricane, tornado, tsunami, typhoon, or other natural, man-made or technical catastrophe, all or some parts of our generation facilities and infrastructure systems will not be disrupted. The occurrence of a significant event disrupting the ability of our power generation assets to produce or sell power for an extended period, including events that preclude existing customers under PPAs from purchasing electricity, could have a material negative impact on our business.
We seek to mitigate future impact where relevant with climate adaptation solutions. The TransAlta South Hedland facility in Western Australia was built with climate adaptation in mind. The facility is designed to withstand a category 5 cyclone. Category 5 is the highest cyclone rating. Floods, which can occur in the area, have been mitigated by constructing the facility above the normal flood levels. In 2019, when a category 4 cyclone hit this facility, operations were not impacted and we were able to continue generating electricity through the storm, despite widespread flooding and the shutdown of the nearby port and associated business activities.
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Management’s Discussion and Analysis
Chronic Risks
We have not identified any chronic physical risks that could impact our operations. However, we continue to further our understanding and integration of climate modelling into our long-term planning.
Climate Change: Metrics and Targets
In 2020, we estimate that 16.4 million tonnes of GHGs with an intensity of 0.67 tonnes per MWh (2019 - 20.6 million tonnes of GHGs with an intensity of 0.75 tonnes per MWh) were emitted as a result of normal operating activities. This reduction of approximately 20 per cent or 4.2 million tonnes CO 2 e is primarily the result of co-firing with gas and lower production volumes at our merchant Alberta coal facilities and lower production from our Centralia coal facility. In 2020, our renewable energy facilities also offset approximately 2.9 million tonnes of CO 2 e for our customers. Because we sell the environmental attributes (offsets and RECs) generated from our renewable energy facilities, we do not net this amount from our total GHGs, but it should be noted that this offset is occurring and our customers are reporting net GHG reductions from TransAlta's renewable energy operating activities.
Our 2020 GHG data is reported to a number of different regulatory bodies throughout the year for regional compliance and, as a result, may incur minor revisions as we review and report data. Any historical revisions will be captured and reported in future disclosure. As per the Kyoto Protocol, GHGs include carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, nitrogen trifluoride, hydrofluorocarbons and perfluorocarbons. Our exposure is limited to carbon dioxide, methane, nitrous oxide and a small amount of sulphur hexafluoride. The majority of our estimated GHG emissions result from carbon dioxide emissions from stationary combustion from coal and natural-gas-powered generation. Emissions data has been aligned with the “Setting Organizational Boundaries: Operational Control” methodology set out in The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard developed by the World Resources Institute and the World Business Council for Sustainable Development. As per the methodology, TransAlta reports emissions on an operation control basis, which means that we report 100 per cent of emissions at facilities in which we are the operator. Emissions intensity is calculated by dividing total operational emissions by 100 per cent of production (MWh) from operated facilities, regardless of financial ownership.
Global warming potentials can vary with respect to regional compliance guidance. We compile our corporate GHG inventory using our business segment GHG calculations. The Clean Energy Regulator in Australia amended global warming potentials in August of 2020 and the use of global warming potentials in our Australia Gas GHG calculations differ from the rest of our fleet as a result of these amendments. Applying harmonized global warming potentials across our fleet would result in a minor variance to our overall calculated GHG totals.
The GHG Protocol Corporate Accounting and Reporting Standard classifies a company’s GHG emissions into three scopes. Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in Scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions. Scope 1 emissions in 2020 were estimated to be 16.3 million tonnes CO 2 e and accounted for 99 per cent of emissions reported. All of our Scope 1 emissions (100 per cent) are reported to national regulatory bodies in the country in which we operate. This includes: Australia (National Greenhouse and Energy Reporting), Canada (Greenhouse Gas Reporting Program) and the US (EPA). Scope 2 emissions in 2020 were estimated to be 0.1 million tonnes CO 2 e. We estimate our Scope 3 emissions in 2020 to be in the range of six million tonnes, which is primarily attributed to our non-operating joint venture interests.
The following are our GHG emissions broken down by business segment, by Scope 1 and 2 and by country in million tonnes CO 2 e. In our business segment breakdown Hydro, Wind & Solar, Corporate and Energy Marketing are shown as 0.0 in million tonnes, but do have minor GHG emissions.

Year ended Dec. 31 | 2020 | 2019 | 2018
Hydro | 0.0 | 0.0 | 0.0
Wind & Solar | 0.0 | 0.0 | 0.0
North American Gas | 1.5 | 1.5 | 1.4
Australia Gas | 1.1 | 1.0 | 1.0
Alberta Thermal | 7.9 | 10.1 | 12.3
Centralia | 5.9 | 8.0 | 6.1
Corporate and Energy Marketing | 0.0 | 0.0 | 0.0
Total GHG emissions | 16.4 | 20.6 | 20.8

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Management’s Discussion and Analysis

Year ended Dec. 31 | 2020 | 2019 | 2018
Scope 1 | 16.3 | 20.4 | 20.6
Scope 2 | 0.1 | 0.2 | 0.2
Total GHG emissions | 16.4 | 20.6 | 20.8

Year ended Dec. 31 | 2020 | 2019 | 2018
Australia | 1.1 | 1.0 | 1.0
Canada | 9.4 | 11.6 | 13.7
United States | 5.9 | 8.0 | 6.1
Total GHG emissions | 16.4 | 20.6 | 20.8

All of our reported 2020 and historical GHG emissions are verified by Ernst & Young LLP to a level of limited assurance. An assurance statement can be found in the back of this Integrated Annual Report. In addition, GHG emissions are verified to a level of reasonable assurance in locations where we operate within a carbon regulatory framework. In Alberta, we verify GHG emissions through the TIER program and, as a result, 51 per cent of our total Scope 1 emissions are also verified to a level of reasonable assurance. Our GHG emissions are calculated using a number of different methodologies depending on the technologies available at our facilities.
We have a target to reduce 60 per cent or 19.7 million tonnes of our GHG emissions by 2030 over 2015 levels. In 2021, we set a new target to be carbon neutral by 2050. Our actions to reduce GHG emissions are aligned with the UN's SDGs, specifically "Goal 13: Climate Action." By 2030, we expect to have reduced close to 30 million tonnes over 2005 levels.
The following highlights our GHG emission reductions since 2005 and our targeted emissions in 2030 (in line with our GHG target). The actual GHG emissions for the Corporation in 2030 will vary from that presented below depending on, among other things, the growth of the Corporation, including its on-site generation business.

Year ended Dec. 31 | 2030 (forecast) | 2020 | 2005
Total GHG emissions (million tonnes CO 2 e) | 12.5 | 16.4 | 41.9

In 2020, TransAlta increased its scoring on the CDP Climate Change investor request. Our overall score was an A-, indicating that we are implementing current best practices. This ranks the Corporation among industry leaders on climate change management and places us as ahead of most companies in North America. The average CDP score for our peers was a B and the average score for reporting companies in North America was a D.
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Management’s Discussion and Analysis
Healthy, Safe, Diverse and Engaged Workplace: Human Capital Management
Engaging our workforce, developing our employees, creating a diverse and inclusive work environment and minimizing safety incidents are the keys to human capital value creation at TransAlta and our most material areas for management.
As of Dec. 31, 2020, we had 1,476 (2019 - 1,543) active employees. This number has decreased by four per cent from 2019 levels, following a reduction in positions in our coal fleet as part of our conversion to gas transition.
With approximately 41 per cent of our employees being unionized, we strive to maintain open and positive relationships with union representatives and regularly meet to exchange information, listen to concerns and share ideas that further our mutual objectives. Collective bargaining is conducted in good faith, and we respect the rights of employees to participate in collective bargaining.
Organizational Culture and Structure
Our employees are central to value creation. Our corporate culture has evolved and adapted throughout our more than 109-year heritage. Our core values are safety, innovation, sustainability, respect and integrity. These five core values help provide clarity for our employees and guide our behaviour and decision-making. They also provide a foundation for leadership, collaboration, community support, personal growth and work/life balance. Through corporate initiatives and support throughout all levels of leadership, we encourage our employees to maximize their potential.
Our six-level organizational structure helps facilitate effective pace and decision-making in our organization. Our business operates as a business-centric model, with Alberta Thermal, Centralia, North American Gas, Australian Gas, Wind and Solar, and Hydro as our six generating segments. In addition, our Energy Marketing segment optimizes our asset fleet and trades electricity and other energy commodities. Our Corporate segment, including finance, legal, administrative, business development and investor relations functions, oversees our business and provides strategic alignment. The Corporation also includes a Shared Services division that oversees our information technology, supply chain, human resources, engineering and accounting functions. The consolidation and centralization of these functions has allowed us to streamline, standardize and, where appropriate, automate these functions while reducing costs and improving service delivery across the organization. Our operations portfolio is run by a single leadership team, which provides operational and financial synergies, enhancing our competitiveness.
TransAlta is committed to improving its internal work environment and the way that employees perceive their work and the Corporation. We track a broad number of factors to provide us insight into our progress and we use a third party to assist us in tracking our progress on an annual basis. We have made continual and notable improvements year-over-year and continue to target further improvements as we look forward.
Health and Safety
The safety of our people, communities and the environment is one of our core values. At TransAlta, we operate large and often complex facilities. The environments in which we work, including Canadian winters and the Australian outback, can add additional challenges to keeping our employees, contractors and visitors safe. Each year we invest significant resources into improving our safety performance, including positively enhancing our safety culture. At meetings of more than four people, we have a practice of starting the meeting with a “safety moment,” which helps share key safety learnings across the Corporation.
TransAlta's management systems underpin the delivery of safe, reliable and competitive electricity to our customers and partners. Our Total Safety Management System is a combination of recognized best practices in process safety, risk management, asset management, occupational health, safety and environmental management. Since expanding our Occupational Health and Safety program in 2015 to encompass Total Safety, we have transitioned from the development and implementation of this framework into continuous improvement, always striving to achieve our Target Zero vision to operate our business with zero unexpected asset failures and zero environmental, health and safety incidents.
In 2020, we continued to progress our safety culture transformation despite an unprecedented and extraordinary challenge due to COVID-19. Behavioural safety training tools and capabilities have been reinforced through leadership peer board sessions and effective safety interactions. We also focused on the development of tools and training to support hazard identification, including updates to Field Level Hazard Assessment cards and a fleet-wide app for Occupation Hazard Assessment. Emphasis on safety interactions, interventions and positive observations for both employees and contractors was also a particular focus in 2020.
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Management’s Discussion and Analysis
In 2020, we achieved a Total Injury Frequency ("TIF") rate of 1.67 compared to 1.12 in 2019. TIF tracks the total number of injuries, including minor first aids, relative to exposure hours worked. The increase in 2020 was a result of increased first aids across our fleet. This may have been due to an increase in contractor presence during projects/construction at our Sundance and Windrise facilities. The COVID-19 pandemic may also have had an impact with a potential for distraction while our workers adjusted to changes in their professional and personal lives.
In addition to TIF, we are tracking Total Recordable Injury Frequency ("TRIF"). TRIF tracks the number of more serious injuries, and excludes minor first aids, relative to exposure hours worked. TRIF provides us with the opportunity to target and monitor our significant injuries. It is also an industry-recognized safety metric and allows us to compare and benchmark our safety performance to that of our peers. Our TRIF result for 2020 was 0.81 compared to 0.73 in 2019. Minor adjustments were made to historical exposure hours, but our reported injuries, TIF and TRIF reporting did not change.

Safety at TransAlta (employees and contractors) | 2020 | 2019 | 2018
Lost-time injuries | 5 | 5 | 1
Medical aids | 9 | 7 | 12
Restricted work injuries | 2 | 3 | 12
First aids | 17 | 8 | 23
Total TIF injuries | 33 | 23 | 48
Exposure hours | 3,948,000 |  | 4,108,000 |  | 5,014,000 |
Total Injury Frequency (TIF) | 1.67 | 1.12 | 1.91
Total Recordable Injury Frequency (TRIF) | 0.81 | 0.73 | 1.00

TRIF is our key safety metric for 2021. TRIF includes restricted work, medical aid and lost-time injuries. We are moving away from reporting TIF, which consists of the same injuries as TRIF, but also includes first aid incidents. We will continue to focus on overall injury reduction (including first aids) through our Significant Incident Communication process. This process ensures that incidents with high potential for loss are thoroughly investigated and lessons learned are shared across the fleet. Reporting TRIF also aligns with the SASB reporting framework.
In addition to TRIF, we have also introduced Total Safety Report Frequency as a key safety metric in 2021. This is a leading indicator that measures Total Safety Reports (hazard, near miss and positive observations) per worker per year. Total Safety Reports are proactive in nature and demonstrate the actions we are taking to identify and prevent an injury or loss from occurring. In this way, we not only manage incidents if they do occur, but methodically work to prevent them from arising in the first place.
As a demonstration to TransAlta’s commitment to safety, SunHills Mining LP was awarded the Safety Excellence Award from the Alberta Mine Safety Association. This award is for best safety performance of all Alberta mines under one million workforce hours based on 2019 performance.
Equity, Diversity and Inclusion
TransAlta’s commitment and focus on excellence in equity, diversity and inclusion (“ED&I”) is found in our workplace amongst our co-workers who at all levels advocate for the core values of equity and inclusion. We believe a strong focus on ED&I will drive performance in innovation, improve service to our customers and positively impact the communities that we all live in.
In 2020, TransAlta formed a ED&I Council and empowered the Council to develop a long-term ED&I strategy. TransAlta also committed to a ED&I Pledge approved by our Board and executive team. The Pledge embodies our vision to strengthen our ED&I practices, and sets out four goals: (a) making our workplaces trusting places by having complex, and sometimes difficult, conversations about ED&I; (b) expanding education in ED&I; (c) creating best practices on meaningful ED&I initiatives; and (d) driving accountability on our ED&I initiatives by transparently reporting to our co-workers, executive team and Board.
In 2020, we also expanded our ED&I training, offering employees a platform for a variety of training, education and awareness on ED&I such as webinars, employee engagement sessions, articles, videos and blogs. Moreover, we obtained diversity and inclusion data from our inaugural ED&I Census, delivered by a third party, which was sent to all employees to understand our demographics and our experiences in the workplace. These census results will inform ED&I action plans for 2021 and beyond.
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Management’s Discussion and Analysis
In early 2021, we received market recognition for our ED&I efforts and were certified by Diversio for our commitment to measuring, tracking and improving ED&I. The Diversio assessment and certification process has set the global standard for inclusion and being certified means that we have measured and set targets to increase diversity, we regularly collect data on our co-workers’ experiences to identify bias and barriers faced by underrepresented groups, and we have implemented programs and policies designed to unlock specific challenges while tracking results.
Gender Diversity
A number of case studies have highlighted the link between gender diversity and additional business value. TransAlta is an active supporter of gender diversity as a driver for value, but also as an ethical business practice. Our commitment to gender diversity in our business is evidenced by our female participation rates on both our executive team and Board. As of Dec. 31, 2020, women made up 43 per cent of our executive officer team and 45 per cent of our Board. These percentages are higher than our peers in Canada. Industry research highlights that the percentage of Board seats held by women from all disclosing Canadian TSX-listed companies in Canada is 21.5 per cent and the average percentage of women on executive teams is 16.8 per cent.
To further support female advancement, we have set targets to: (a) maintain equal pay for women in equivalent roles, (b) achieve 50 per cent representation of women on our Board by 2030 and (c) achieve 40 per cent representation of women among all employees by 2030. Our goal to achieve 40 per cent women across the entire workforce by 2030 is ambitious considering the majority of the operational roles are currently male dominated. Currently, women employees represent 21 per cent of all employees.
TransAlta was once again added to the Bloomberg Gender-Equality Index in 2021. Inclusion in the index recognizes our comprehensive investment in workplace gender equality and our commitment to driving progress by developing inclusive policies and disclosing data using Bloomberg’s gender reporting framework. In 2020, TransAlta was also recognized on the Globe and Mail’s Women Lead Here inaugural survey and was included as an honoree for executive gender diversity in Canada.
Employee Retention & Recognition
Employee Retirement Savings Programs
TransAlta is an attractive employer in all three countries in which we operate. We provide compensation to our employees at levels that are competitive in relation to their respective location. We strive to be an employer of choice through our total rewards programs, which include various incentive plans designed to align performance with our annual and longer-term targets, as determined annually by the Board.
Retirement savings plans are an example of rewards we provide. We have registered pension and savings plans in Canada and the US. The plans cover substantially all employees of the Corporation, its domestic subsidiaries and specific named employees working internationally. These plans have defined benefit (“DB”) and defined contribution (“DC”) options, and in Canada there is an additional non-registered supplemental pension plan (“SPP”) for members whose annual earnings exceed the Canadian income tax limit. The DB SPP was closed as of Dec. 31, 2015, and a new DC SPP commenced for executive members hired after Jan. 1, 2016. The Corporation's executive officers as of Dec. 31, 2015, were grandfathered in the DB SPP.
The Canadian and US DB pension plans are closed to new entrants, with the exception of the Highvale mine (SunHills) pension plan acquired in 2013. The US DB pension plan was frozen effective Dec. 31, 2010. The plans are funded by the Corporation in accordance with governing regulations and actuarial valuations. In addition, in Canada, we provide some optional plans for employees to enhance their financial wellness and retirement savings, with group RRSP and TFSA plans.
In Australia, employees can nominate a superannuation fund for superannuation contributions. The Australian superannuation scheme is compulsory for employers with contributions required at a rate set by the government.
Other Employee Benefit Programs
TransAlta provides competitive benefit programs for most of our employees (options are dependent on the countries in which we operate). We also provide benefit programs based on negotiated union agreements in certain locations. Our flexible benefit plans provide employees and their families with choices of coverage including, among others, extended health, dental, vision, life insurance, critical illness, accident, disability and a health spending account.
In 2020, we added Telehealth benefits that include employee access to virtual doctor visits, remote chronic condition management, and online or telephone access to medical support and information. We provide other health and dental benefits for disabled members and retired members, typically up to the age of 65. The Canadian retiree benefits plan was closed for all new hired employees as of March 1, 2017.
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Management’s Discussion and Analysis
In 2020, the BOLT Awards were launched to provide timely rewards and recognition for work on transformational initiatives and project work, as well as to recognize above-and-beyond performance. The BOLT Awards have acted as an umbrella program whereby individual performance can be recognized in one place, frequently and in a consistent manner.
On an annual basis, TransAlta recognizes our top achievements through the President’s Awards. During 2020, we added an additional award for Leadership Excellence. This award recognizes a people leader who consistently demonstrates TransAlta’s values in their decision-making and actions, has a bias to action that achieves key business outcomes and is recognized by their team as a trusted advisor and mentor.
TransAlta’s focus on organizational health resulted in top quartile results in 2020 benchmarked against 823 surveys and a total of 2.8 million respondents. This was accomplished by identifying eight priority practices and incorporating those practices into all facets of the organization.
Lastly, a Remote Work Program was developed in 2020 to provide employees with alternative permanent remote work options. This program allowed eligible employees to choose between working from home or within a TransAlta location.
Talent and Employee Development
Talent and employee development is viewed as a key pillar of organizational health. Investing in our employee development enhances employees’ skills and improves productivity and engagement. This contributes to a strong corporate culture that provides value for TransAlta.
In 2020, we continued with the Leadership Development Program that was launched the previous year. This program provided 143 leaders or future leaders with fundamental leadership skills and tools. Training programs focused on a variety of leadership competencies for participants with various years of management experience. In December 2019, we launched a Professional Development Library that contains over 600 articles on professional development and leadership and is updated on a monthly basis. We created this library with a Master Executive Coach and it is accessible to all employees. Since the creation of the library, we have had over 5,000 hits and we have over 375 regular users.
During 2020, TransAlta partnered with BetterUp, a consultancy providing professional coaching, to provide 1:1 coaching for 30 leaders. This was offered to people leaders as part of the Leadership Development initiative. BetterUp coaching is tailored to the individual’s needs to allow them to work with their personal coach on areas that are important for them. Over the summer of 2020, 80 leaders were offered the Franklin Covey All Access Pass — this resource was packaged with our 7 Habits of Highly Effective People training and expanded on the training with articles, videos and activities. The Senior Leadership also completed The Good Fight training, which focused on reframing perceptions on conflict and how to stop conflict avoidance. Remote work training was offered to all leaders and employees to help them work effectively in a remote setting.
During 2020, Alberta Merchant Market Training was developed internally by stakeholders in Operations, and Trading and Marketing. This training consisted of three modules, including power market fundamentals, the Alberta power market, generation portfolio and portfolio optimization, among other topics. This training was available to all employees to enhance their knowledge of the Alberta merchant market.
Partnering with Blue Ocean Brain, a micro-learning consultancy, TransAlta implemented compulsory ED&I training for all employees. This training included five modules on topics such as unconscious bias and allyship. In addition, Blue Ocean Brain was also engaged to provide 200 leaders with access to their learning library in 2021.
We launched the New Grad Program in 2020 with new graduates rotating through Corporate Finance, Trade Finance and HR. Each graduate participates in three rotations, each lasting eight months. This program is intended to develop knowledge and skills through work experience within multiple business units.
During 2020, TransAlta has had 17 intern and co-op placements with students in various areas of study including business, communications, finance and engineering. To assist in subsidizing the internship and co-op programs, TransAlta continues to partner with Electricity Human Resources Canada to access government funding. In 2020, TransAlta received wage subsidies of $120,000. In 2020, TransAlta also participated in the Canada Alberta Job Grant, which reimburses employers two-thirds of the cost of approved external training. TransAlta is currently approved to receive $56,000 to cover approved training costs.
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Management’s Discussion and Analysis
Positive Indigenous, Stakeholder and Customer Relationships:
Social and Relationship Capital Management
We strive to create shared value for our stakeholders through social and relationship value creation at TransAlta. The most material impacts on our social and relationship performance are public health and safety, anti-competitive behaviour and fostering positive relationships with Indigenous neighbours, communities, stakeholders, governments, industry and landowners in the areas where we operate.
Human Rights
We operate in Canada, the US and Australia. All of these countries have high human rights standards. TransAlta respects the fundamental human rights of all its employees, contractors, suppliers, partners, Indigenous partners and other stakeholders. We abide by human rights legislation in all the jurisdictions in which we operate. We have a zero tolerance approach to discrimination based on age, disability, gender, race, religion, colour, national origin, political affiliation or veteran’s status or any other prohibited ground as defined by human rights legislation in the jurisdictions in which we operate. We afford equal opportunities for men and women, support the right to freedom of association and the right to organize unions and bargain collectively. We do not conduct operational human rights reviews or impact assessments, but we do continue to operate aligned with the highest ethical standards, such as ISO 14001 and ISO 18001.
Indigenous Relationships and Partnerships
At TransAlta, we value our relationships and partnerships with stakeholders and our Indigenous partners. Our Indigenous Relations team focuses on community engagement, employment, economic development and community investment. We ensure that TransAlta’s principles for engagement are upheld and that the Corporation fulfils its commitments to Indigenous communities. Efforts are focused on building and maintaining solid relationships and establishing strong communication channels that enable TransAlta to share information regarding operations and growth initiatives, gather feedback to inform project planning and understand priorities and interests from communities to better address concerns.
Methods of engagement include:
▪Relationship building through regular communication and in-person meetings with representatives at various levels within Indigenous community organizations;
▪Hosting company-community activities that share both business information and cultural lessons;
▪Maintaining consistent communications with each community and following appropriate community protocols and procedures;
▪Participating in community events such as pow wows and blessing ceremonies; and
▪Providing both monetary and in-kind sponsorships for community initiatives.
TransAlta is proactive with initiating engagement early on in project development to allow concerns to be identified promptly and addressed, minimizing potential project delays. We conduct consultation primarily during project development and decommissioning and maintain engaged communication throughout the operation phase. We work with communities to build a relationship with a foundation of ongoing communication and mutual respect.
COVID-19 health measures posed challenges to how we engaged with Indigenous communities throughout 2020. However, we continued to have regular dialogue by telephone, email, video conference and whenever possible, in small group meetings while adhering to government health protocols. Our normal participation in Indigenous community events such as pow wows, blessing ceremonies, and school or recreational activities was not possible as social gatherings were not permitted during the pandemic. In response, our Indigenous Relations team determined it was important to reallocate funding for social events to support Indigenous communities and their expressed needs.
Support from TransAlta for Indigenous communities in response to the pandemic included the:
▪Purchase and distribution of 400 school backpacks filled with grade-specific school supplies delivered to First Nation schools in Alberta to help alleviate pressures on household and community resources;
▪Purchase of more than 200 Christmas gifts for school students at Mother Earth’s Children’s Charter School and Wihnemne School on Paul First Nation;
▪Purchase of Christmas gift cards for Elders per requests from Piikani and Siksika Nations; and
▪Funding for the purchase of COVID-19 testing equipment for the Alexis Nakota Sioux Nation.
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Management’s Discussion and Analysis
Support for Indigenous Youth, Education and Employment
TransAlta recognizes the importance of investing in Indigenous students and our financial support helps students complete their education, become self-sufficient and give back to their communities. We are keen to help young Indigenous students reach their full potential and achieve their dreams. We also believe in providing financial support to Indigenous primary school students, helping to instill a passion for lifelong learning. In 2020, TransAlta provided more than $340,000 to support Indigenous youth, education and employment programs across Canada.
Highlights include:
▪Entered into an agreement with Mount Royal University Foundation in support of the Indigenous Housing Renovation Fund, which will feature an Indigenous family tipi in an outdoor space dedicated to Indigenous students and supporting Indigenous cultural programming;
▪Continued our partnership with Indspire, Canada’s national Indigenous registered charity, and through this program, 10 bursaries of $3,000 each were given to recipients from the following communities: Ermineskin Cree Nation, Paul First Nation, Sunchild First Nation, Piikani Nation and Aamjiwnaang First Nation;
▪Continued our support of Indigenous students with the Southern Alberta Institute of Technology ("SAIT") Gap program. This program provides critical financial support needed for aspiring Indigenous students who require high school upgrading in order to qualify for a trade program where there is a "gap" in available funding;
▪In partnership with the United Way of Calgary & Area, designated funding to the Diamond Willow Youth Lodge, a safe place for Calgary Indigenous youth to connect with peers and participate in a variety of programs that promote health and wellness, education and employment preparation;
▪Provided funding to the Lac Ste. Anne Métis Capacity Fund to support the training needs of community members including youth and women, and the provision of personal protective equipment for individuals entering the workforce; and
▪Continued our ongoing partnership with the Banff Centre for Arts and Creativity with scholarship funding allocated to Indigenous community members to participate in Indigenous Leadership programming.
Cultural Awareness for TransAlta Employees
Our Indigenous Relations team led two cultural awareness initiatives for TransAlta employees in 2020. The first program was launched in June in recognition of National Indigenous History Month and National Indigenous Peoples Day (June 21). TransAlta hosted a virtual Lunch and Learn session featuring an interview with a community member from Paul First Nation and TransAlta’s senior advisor for Indigenous & Stakeholder Relations, moderated by our Chief Legal, Regulatory, & External Affairs Officer. On Sept. 30, 2020, in recognition of Orange Shirt Day, TransAlta’s Executive Leadership Team encouraged all employees to wear orange to promote awareness in Canada about the Indian residential school system and the impact it has had on Indigenous communities for over a century. In addition, a comprehensive educational program was designed and delivered to Operations leaders providing information on Indigenous history, culture, consultation requirements and TransAlta’s relationship protocols and practices.
In 2021, we adopted a new sustainability target stating that all employees should complete Indigenous cultural awareness training by the end of 2023. We believe education is a key ingredient to ensure respectful and strong relationships into the future.
Stakeholder Relationships
Fostering relationships with our stakeholders is important to TransAlta. Driven by our values, we seek to maximize value creation for our stakeholders and the Corporation. We take a proactive approach to building relationships and understanding the impacts our business may have on local stakeholders.
TransAlta Stakeholders
To act in the best interests of the Corporation and to optimize the balance between financial, environmental and social value for both our stakeholders and TransAlta, we seek to:
▪Engage regularly with stakeholders about our operations, growth prospects and future developments;
▪Consider feedback and make changes to project designs and plans to resolve and/or accommodate concerns expressed by our stakeholders; and
▪Respond in a timely and professional manner to stakeholder inquiries and concerns and work diligently to resolve issues or complaints.
Our stakeholders are identified through stakeholder mapping exercises conducted for each facility and prospective project development or acquisition. Through decades of stakeholder relations in the areas of our facilities, we have developed a strong knowledge of who our stakeholders are and have gained understanding of our stakeholders' issues and concerns.
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Management’s Discussion and Analysis
Our principal stakeholder groups are listed in the following table.

TransAlta Stakeholders
Non-governmental organizations (NGOs) | Community associations and organizations | Connecting transmission facility operators
Regulators | Industry organizations | Communities
Charitable organizations/Non-profit | Standards organizations | Retirees
All levels of government | Media | Residents/Landowners
Suppliers | Business partners | Investor organizations
Contractors | Unions/Labour organizations | Financial institutions
Government agencies | Forest associations/Industry | Mineral rights owners
System operators | Oil & gas associations/Industry | Railroad owners
Customers | Think tanks | Utility owners
Municipalities | Academics |

Engagement Framework
Our stakeholder engagement framework is modelled after and closely tied to the stakeholder engagement aspect of ISO 14001, which is an internationally recognized environmental management standard. This framework is a streamlined corporate-wide approach to ensure that engagement and relationship-building practices are consistent across TransAlta’s locations and types of work. Although we no longer certify under ISO 14001, we continue to operate within its established best practices.
Methods of Engagement
In order to run our business successfully, we maintain open communication channels with stakeholders. We commit to timely and professional resolution using values-based dialogue. We work internally and with each stakeholder to identify how to mitigate further issues.
Examples of our methods of engagement are listed in the following table.

Information & communication | Dialogue & consultation | Relationship building
Open houses, town halls and public information sessions | In-person meetings with local groups and communities | Community advisory bodies
Newsletters, telephone conversations, emails and letters | Meetings with individual stakeholders (e.g., landowners and residents) | Capacity agreements
Websites | Targeted audience sessions | Sponsorships and donations
Social media postings | Tours of our facilities and sites | Hosting events

A key focus of our work is to support business growth through proactive engagement with stakeholders in our geographic operating areas in Australia, Canada and the US to develop and maintain relationships, assess needs and fit, and seek out collaborative and sustainable value creation opportunities. This helps ensure any stakeholder concerns are identified and can be addressed early in the development process, thereby minimizing project delays. We conduct consultation primarily during project development and decommissioning and maintain engaged communication throughout operations. For example, we implemented our stakeholder engagement program with stakeholders and Indigenous groups in connection with the proposed repowering at the Sundance and Keephills facilities. We filed our regulatory applications in December 2019, and our stakeholder engagement program will continue for the entire life cycle of the facilities.
Engagement Tracking and Reporting
Our Stakeholder and Indigenous Relations tracking program functions as an enterprise-wide communication record-keeping tool managed by our Stakeholder and Indigenous Relations team. This capacity fulfils our requirements for consultation with stakeholders and Indigenous groups alike, and is capable of producing regulatory reports as proof of engagement and consultation efforts. The tool can store email conversations, documents and voicemail messages related to any project, event or issue, and display them in a report format. It can also produce an array of statistical reports showing frequency and volume of engagement based on project, stakeholder, stakeholder group or keywords. This tracking program decreases the time and cost required to submit proof of engagement to government agencies.
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Management’s Discussion and Analysis
Engagement and Board Communication
The Board believes that it is important to have constructive engagement with its shareholders and other stakeholders and has established means for the shareholders of the Corporation and other stakeholders to communicate with the Board. For example, employees and other stakeholders may communicate with the Board through the AFRC by writing to the AFRC or by making submissions via the Corporation’s toll-free telephone or online Ethic Helpline (please refer to the "Governance and Risk Management - Risk Controls - Whistleblower System" section in this MD&A for more details). Shareholders are also invited to communicate directly with the Board under the Corporation’s Shareholder Engagement Policy, which outlines the Corporation’s approach to proactive director-shareholder engagement at and between the Corporation’s annual shareholders meetings. Under the Shareholder Engagement Policy, shareholders can submit questions or inquiries to the Board, to which the Corporation will respond. A copy of the Shareholder Engagement Policy is available on our website at www.transalta.com. Shareholders and other stakeholders may, at their option, communicate with the Board on an anonymous basis. In addition, the Board has adopted an annual non-binding advisory vote on the Corporation’s approach to executive compensation (say-on-pay). The Corporation is committed to ensuring continued good relations and communications with its shareholders and other stakeholders and regularly evaluates its practices in light of any new governance initiatives or developments in order to maintain sound corporate governance practices.
Throughout 2020, representatives of the Board engaged extensively with the Corporation's significant shareholders. Specifically, since Jan. 1, 2020, the Board has met with 11 shareholders representing approximately 37 per cent of the Corporation’s total issued and outstanding common shares.
Supply Chain – Sustainable Sourcing
We continue to seek solutions to advance supply chain sustainability. In 2020, we worked to optimize our global supply chain management operations by initiating the centralization and standardization of practices across our global operations. As we explore major projects, we assess vendors both at the evaluation stage and as part of information requests on such elements as safe work practices, environmental practices and Indigenous spend. This means, for example, getting information on:
▪Estimated value of services that will be procured though local Indigenous businesses;
▪Estimated number of local Indigenous persons that will be employed;
▪Understanding overall community spend and engagement; and
▪Understanding the state of community relations through interview processes and stakeholder work.
In 2019, the Board adopted a Supplier Code of Conduct that applies to all vendors and suppliers of TransAlta. Under this code, suppliers of goods and services to TransAlta are required to adhere to our core values, including as they pertain to health and safety, ethical business conduct and environmental leadership. The code also allows suppliers to report ethical or legal concerns via TransAlta’s Ethics Helpline.
In addition, we rolled out a Supplier Relationship and Performance Management program in 2020 with a few of our key and strategic suppliers. The goals of the program include ensuring alignment of our suppliers’ goals with those of TransAlta, streamlining communications while providing a platform to discuss how to elevate performance, creating value though access to innovative ideas and working closely with the suppliers on executing activities more cost-effectively.
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Management’s Discussion and Analysis
Public Health and Safety
We seek to preserve public health and safety. It is our goal to maintain security for our employees and the peoples and communities where we operate.
We specifically look to minimize the following risks:
▪Harm to people;
▪Damage to property;
▪Operational liability; and
▪Loss of organizational reputation and integrity.
We work to prevent incidents and lower our risk by administering security controls such as restricting physical access around and into our operating facilities. The use of security technology such as surveillance cameras and electronic access is utilized to ensure the control of secure areas. Regular audits and security risk assessments are conducted to ensure continuous improvement of the Security Management Program. Our Security Management Program is focused on protection of people, property, information and reputation.
The Corporate Emergency Management Program prepares employees should an emergency incident occur. The program includes an emergency management policy and standard, which sets an expectation for employees to continuously prepare for emergencies. The program has executive sponsorship. It provides the overarching framework for each business unit to provide an Emergency Response Plan and Business Continuity Plan. We implement our Incident Command System, which is a standardized on-scene emergency and incident management system that provides an organizational structure able to respond to single or multiple incidents. Designed to aid in the management of resources during incidents, it combines facilities, equipment, personnel, procedures and communications operating within a common organizational structure. It is used as part of an all-hazards approach for incident management and is officially recognized for multi-agency response in emergency situations, however complex.
We develop strong relationships with local emergency responders. We periodically conduct multi-agency training events at our facilities. This ensures continuous improvement, familiarity with our assets and builds strong communication channels for emergency response.
Our processes designate how we communicate with stakeholders in the event of a crisis. This is managed by our Crisis Communications Team. The team has the responsibility and goal to provide a unified message on behalf of Corporation throughout the response and recovery, ensure all messaging is approved by the Incident Commander (the Chief Talent & Transformation Officer, or their designate), co-ordinate messaging with any applicable external agencies and, if necessary, deploy to an incident site.
Annual training requirements are adhered to by our employees operating at our facilities. The results are tracked, audited and presented at our annual executive review. The findings and recommendations assist in maintaining a sustainable program across the organization.
Data and Digital Asset Protection
We work hard to protect our digital assets, including our corporate data and our digital identities that give us access into line of business applications. Cybersecurity risks that work to compromise these assets include the manipulation of data integrity, system and network hacking, use of social engineering tactics through email phishing, compromise of operations and infrastructure through the use of ransomware, credential breaches, attacks introduced through unknowing third-party vendors and service providers, as a well as malware. Given the ever-evolving nature of cyberattacks, we are consistently adapting our cybersecurity program to focus on three key pillars: technology, processes and people. Each of these pillars can be reinforced independently to address specific cyber risks and threats through a comprehensive and multi-faceted program. Through this program, TransAlta continually implements measures and controls to proactively mitigate internal and external cybersecurity risks and threats posed to the organization, and to deal efficiently and effectively with threats.
Please refer to Cybersecurity Risk in the Governance and Risk Management section of this MD&A for further details.
Community Investments
In 2020, TransAlta contributed approximately $2.2 million in donations and sponsorships (2019 - $2.1 million). One of our significant community investments each year is to United Way campaigns across Canada and the US. This year, TransAlta employees, retirees, contractors and the Corporation raised over $1.3 million for the United Way. TransAlta has been supporting the United Way for over 30 years and has contributed more than $20 million dollars over that time.
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Management’s Discussion and Analysis
In 2020, we continued to focus our community investment on priority areas for TransAlta: youth and education, environmental leadership and community health and wellness. Some of our partnerships included:
▪Indspire, Canada’s national Indigenous registered charity, and through this program 10 bursaries of $3,000 each were given to recipients from the following communities: Ermineskin Cree Nation, Paul First Nation, Sunchild First Nation, Piikani Nation and Aamjiwnaang First Nation;
▪Mother Earth's Children's Charter School ("MECCS") - Located in Treaty 6 territory, near Stony Plain, Alberta, and our Alberta coal operations, MECCS has become an important part of TransAlta’s community investment program. MECCS offers education for students from Kindergarten to Grade 9 and is cited as Canada’s first and only Indigenous children’s charter school. The school was established in 2003 to help provide Indigenous students with an education based strongly on cultural context rather than a traditional western educational model. Approximately 95 per cent of MECCS students are of Indigenous ancestry, with students coming from Paul First Nation, Enoch Cree Nation, Alexis Nakota Sioux Nation, Alexander First Nation, Alberta Beach, Stony Plain and Edmonton. The student population is diverse and includes Métis, Cree, Nakota Sioux and Stoney. Beginning in 2014, TransAlta has made an annual $35,000 donation to the school. In addition, each year at Christmas, TransAlta staff purchase Christmas presents for the students. Volunteers from TransAlta travel to the school to deliver the gifts, providing both our employees and the students the opportunity to engage with each other. Due to the COVID-19 pandemic, this tradition needed to be conducted remotely. More than 200 Christmas gifts were purchased for students at Mother Earth’s Children’s Charter School and Wihnemne School on Paul First Nation;
▪The Calgary Stampede – Founded in 2017, the TransAlta Performing Arts Studio at Stampede Park continues to provide a year-round facility for the Calgary Stampede Foundation and Calgary’s youth performing arts groups to rehearse, train and celebrate the arts;
▪SAIT Gap program, which provides critical financial support needed for aspiring Indigenous students who require high school upgrading in order to qualify for a trade program where there is a "gap" in available funding;
▪TransAlta Tri-Leisure Centre - The TransAlta Tri-Leisure Centre is a sporting and recreation destination for many active and involved residents from the communities of Parkland County, Spruce Grove and Stony Plain in Alberta. At the facility, thousands of local residents and many of our employees participate in a wide range of sporting and cultural activities and join together in many community causes;
▪The Banff Centre for Arts and Creativity – We continued our ongoing partnership with the Banff Centre with scholarship funding allocated to Indigenous community members to participate in Indigenous leadership training;
▪Junior Achievement Southern Alberta – TransAlta continued to support the World of Choices program that gives students an opportunity to connect with mentors in a number of different careers. In 2020, this program was delivered online, allowing hundreds of students to connect with mentors and learn about different career opportunities;
▪Calgary Reads – TransAlta was proud to continue our support for this organization that is dedicated to improving literacy skills for children in Calgary; and
▪Energy Transition Support – On July 30, 2015, in Washington State, we announced a US$55 million community investment over 10 years to support energy efficiency, economic and community development, and education and retraining initiatives. The US$55 million community investment is part of the TransAlta Energy Transition Bill passed in 2011. This bill was an historic agreement between policymakers, environmentalists, labour leaders and TransAlta to transition away from coal in Washington State by closing the Centralia facility’s two units, one in 2020 and the other in 2025. Three funding boards were formed to invest the $55 million: the Weatherization Board ($10 million), the Economic & Community Development Board ($20 million) and the Energy Technology Board ($25 million). To date, the Weatherization Board has invested $7 million, the Economic & Community Development Board $14 million and the Energy Technology Board $9 million. Specific projects that the boards funded in 2020 include energy-efficiency projects at local fire stations and low income housing, funding to support COVID-19 personal protection equipment for local businesses and schools, and a project to deploy the first renewable hydrogen fuelling station in the Pacific Northwest, which benefits both the electricity and transportation sectors.
Customers
TransAlta serves industrial and commercial customers with power and energy services across its fleet (Australia, Canada and the US). For more information on our customer focus, please refer to page 79 of this MD&A.
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Management’s Discussion and Analysis
Technology Adoption and Innovation Focus: Manufactured Capital Management
Technology and innovation are an existing and increasing focus at TransAlta. As we navigate significant macro changes from energy transition, the impacts of climate change and decarbonization, and the continued rise of digital technology, automation and artificial intelligence, we are proactively applying technology solutions across our business. Our conversion of coal units to gas is an excellent example of utilizing useful manufactured capital or infrastructure. We also continue to adopt and apply innovative solutions to meet customer demand for power.
Innovation: Idea Generation and Project Management
Project Greenlight has been a key driver in ensuring the Corporation continues to provide year-over-year improvements in innovation. The program is focused on bottom-up innovation, which means ideas are generated by employees. Emphasizing bottom-up innovation across the Corporation has resulted in a strong culture of idea generation, where employee ideas are developed and advanced into business cases, adhering to project management best practices to ensure the delivery and success of the initiative.
Another initiative we promote is the Supplier Innovation Series, which brings in guest speakers from outside TransAlta to discuss innovation. This includes thought leaders on new technologies to discuss conceptual ideas that initiate creative thinking and suppliers that provide insight into commercial applications of evolving technologies. In 2020, the topics discussed included artificial intelligence, virtual and augmented reality, robotic welding, the connected workforce, design thinking and innovation in safety. Subsequent to each session, small employee-led workshops consolidate ideas to further flesh out and drive new Greenlight initiatives.
Key priority practices addressed by the Supplier Innovation Series:
▪Creativity and entrepreneurial thinking;
▪Bottom-up innovation;
▪Knowledge sharing; and
▪Capturing external ideas.
For further details on our investment in our workforce, please see the Talent and Employee Development section of this MD&A.
Innovation: Infrastructure Innovation
In 2015, the Government of Alberta introduced regulations designed to end coal-powered generation in the province by 2030. A number of our coal facilities had useful lives beyond 2030 and could be converted to use natural gas. We are planning to convert or repower Alberta coal units to natural gas in the 2020 to 2023 time frame. Our Sundance 6 facility has recently been converted to gas. Through our conversion to gas and the repowering of Sundance 5, our energy use, GHG emissions, air emissions, waste generation and water usage will significantly decline. Repurposing the facilities rather than decommissioning them supports the concept of reuse and aligns with the UN's SDGs, specifically "Goal 9: Industry, Innovation and Infrastructure."
Innovation: Applied Technologies
TransAlta has been at the forefront of innovation in the power-generation sector since the early 1900s when we developed hydro assets. We have been an early adopter and developer of wind technology in Canada and are now one of the largest wind generators in the country. Today we run a Wind Control Centre that monitors, to the second, every wind turbine we operate across North America. In 2015, we made our first investment in solar technology with the purchase of a 21 MW solar facility in Massachusetts and in 2020 we installed the first utility-scale battery in Alberta at our Summerview II wind facility. From 2000 to 2020, we have grown renewables capacity from approximately 900 MW to over 2,500 MW.
As we balance growth with decarbonization, we continue to seek solutions to innovate and create value for investors, society and the environment. This is evidenced by our continued execution of the accelerated conversion to gas plans, construction of the 207 MW Windrise wind project located in Alberta, and investment in the 137 MW Skookumchuck wind facility in Washington State. In 2020, we also acquired a contracted 29 MW cogeneration facility in Michigan. Cogeneration is recognized by regulatory bodies for its efficient generation of power when compared to other forms of natural gas power generation. It reduces the natural gas required by industrial processes by generating high-efficiency steam and power versus a boiler and grid supply approach. The distributed system also provides independence from the power grid and avoids the need to construct additional transmission lines.
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We are also investing in battery storage. TransAlta began commercial operations of Alberta’s first utility-scale lithium-ion battery storage facility, called WindCharger, on Oct. 15, 2020. This project is unique as it uses TransAlta’s existing Summerview II wind facility to charge the battery, allowing WindCharger to be a truly renewable battery energy storage system. The project uses Tesla technology and has a nameplate capacity of 10 MW with a total storage capacity of 20 MWh. TransAlta received co-funding for this project from Emissions Reduction Alberta. The potential exists for the expansion of this technology, and we are investigating the viability of battery storage at our various wind facility locations and for use in developing customer-specific energy supply solutions.
Our teams continuously explore the use of applied or new technologies to find solutions to expand or adapt our fleet in an ever-changing world. This helps protect our shareholder value and maintain delivery of reliable and affordable electricity. We know that new technologies will emerge over the next number of years as the industry continues to drive towards lower emissions while maintaining a reliable and affordable product for customers. Our teams continue to be involved in assessing emerging technologies such as hydrogen and carbon capture and storage as well as the development of bespoke behind-the-fence solutions for customers using a combination of technologies such as renewables and batteries. The following are further examples of how we have developed innovative solutions to optimize and maximize value from our fleet:
Operations Diagnostic Centre
TransAlta has run its Operations Diagnostic Centre (“ODC”) since 2008. The ODC monitors coal-fired, gas-fired and wind generating assets across Australia, Canada and the US. A centralized team of engineers and operations specialists remotely monitors our power facilities for emerging equipment reliability and performance issues. ODC staff are trained in the development and use of specialized equipment monitoring software and they apply their experience to power facility operations. If an equipment issue is detected, the ODC notifies facility operations to investigate and remedy the issue before there is an impact to operations. This support is critical to reliability and performance of our operations. By way of example, if a wind turbine starts to underperform compared to others, our operation team is notified and will work to investigate and remedy the issue. The monitoring, analysis and diagnostics completed by the ODC are focused on early identification of equipment issues based on longer-term trend analysis and complements day-to-day facility operations.
Data & Innovation
TransAlta created the Data & Innovation team in 2019 to modernize its data infrastructure to take advantage of new opportunities in analytics and artificial intelligence. The Data & Innovation team is cross-functional, composed of data architects, data scientists, data analysts, software developers, engineers, project managers, and financial and systems analysts. The team focuses its efforts on the delivery and enhancement of TransAlta’s Modern Data Architecture, the rapid delivery of data-driven applications, the design and implementation of machine learning and artificial intelligence models and the advancement of process automation through the Robotic Process Automation Centre of Excellence. In 2020, the Data & Innovation team worked with partners across the business to create new tools and processes that improve our financial position and return capacity to our people. A few of the highlights from this work include:
▪GenOS, an innovative new platform where data is used to drive the actions of our assets and the decisions of our people, piloted with Wind Operations. This pilot project combines data and analytics from a variety of sources into one central web application and creates new opportunities to drive further adoption of automation across our operations; and
▪Industry partnership with AltaML Applied AI Lab, a groundbreaking initiative that focuses on building and expanding local talent while improving our business through the application of machine learning and artificial intelligence.
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Management’s Discussion and Analysis
2020 Sustainability Targets Performance
Sustainability Targets and Results
Our sustainability goals and targets support the long-term success of our business. Goals and targets are established to manage key or emerging material sustainability issues and to improve our performance in these areas.
We establish our goals and targets with reference to the UN's SDGs and the Future-Fit Business Benchmark. This focus ensures our goals and targets are meaningful in the broader context of solving societal problems; support the ambition of achieving a more sustainable, safe and just planet in the future; and ensure TransAlta's competitiveness, both today and in the future.

ESG Alignment: Environment
TransAlta Sustainability Goal | TransAlta Sustainability Target | Results | Comments
Minimize fleet-wide environmental incidents | Keep annual significant environmental incidents below two and keep environmental regulatory non-compliance incidents below four | Not achieved | In 2020, we recorded six significant environmental incidents. None of these incidents was large in terms of magnitude or impact, which is consistent with past performance and suggests these types of incidents are not a major risk for the Corporation or the environment. For 2021, we are removing our target for environmental incidents but continuing to report on these events in the Incidents and Spills section of the MD&A. We are making this change to focus our targets on environmental areas that are more material for the Corporation.
Reclaim land utilized for mining | By 2040, complete full reclamation of our Centralia coal mine in Washington State | On track | Reclamation work at our Centralia and Highvale mines was paused in 2020 due to the COVID-19 pandemic.
Reduce air emissions | By 2030, achieve a 95 per cent reduction of SO 2 emissions | On track | We are well on track to achieve our target of 95 per cent emission reductions of SO 2 by 2030. Since 2005, we have reduced SO 2 emissions by 83 per cent. In 2020, we reduced SO 2 emissions by approximately 4,000 tonnes over 2019 levels.
By 2030, achieve a 50 per cent reduction of NO x emissions below 2005 levels from TransAlta coal facilities | Achieved | We have achieved our target of 50 per cent emission reductions of NO x by 2030 ahead of schedule. Since 2005, we have reduced NO x emissions by 68 per cent. In 2020, we reduced approximately 5,000 tonnes of NO x emissions over 2019 levels.
Reduce GHG emissions | By 2030, achieve company-wide GHG reductions of 60 per cent below 2015 levels, in line with a commitment to the UN SDGs and prevention of 2ºC of global warming | On track | We are well on track to achieve our target of 60 per cent GHG emissions reductions by 2030. Since 2015, we have reduced GHG emissions by 80 per cent. In 2020, we reduced approximately 4.2 million tonnes of CO 2 e over 2019 levels.
ESG Alignment: Social
TransAlta Sustainability Goal | TransAlta Sustainability Target | Results | Comments
Reduce safety incidents | Achieve a Total Injury Frequency rate below 1.17 | Not achieved | In 2020, we achieved a TIF of 1.67 compared to 1.12 in 2019. The increase in 2020 was a result of increased first aids across our fleet. This may have been due to an increase in contractor presence during projects and construction at our Sundance and Windrise facilities. There was also potentially an effect from adjustments that all of our workforce had to make due to the COVID-19 pandemic.

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Management’s Discussion and Analysis

Support prosperous Indigenous communities | Support equal access to all levels of education for youth and Indigenous peoples through financial support and employment opportunities | Achieved | Support in 2020 represented a total value of $340,000 and provided bursaries through a partnership with Indspire; funded academic upgrading programs through SAIT; supported an Indigenous Leadership Program; and maintained communication on employment opportunities through various mediums to support different access options for Indigenous communities.
ESG Alignment: Governance
TransAlta Sustainability Goal | TransAlta Sustainability Target | Results | Comments
Strengthen gender equality | Achieve a quota of 50 per cent female representation on the Board by 2030 | On track | As of Dec. 31, 2020, women made up 45 per cent of our Board.
Achieve at least 40 per cent female employment among all employees of the Corporation by 2030 | On track | As of Dec. 31, 2020, women made up 21 per cent of all employees, an increase over 2019 levels (20 per cent).
Maintain equal pay for women in equivalent roles as men | Achieved | Equal pay for women in the Corporation was maintained in 2020.
Demonstrate leadership on ESG reporting within financial disclosures | Maintain our position as a leader on integrated ESG disclosure through increased annual alignment with leading sustainability disclosure frameworks | Achieved | In 2020, we increased our alignment with the SASB sustainability reporting framework and increased our CDP Climate Change Scoring to an A-.
ESG Alignment: Environment and Social
TransAlta Sustainability Goal | TransAlta Sustainability Target | Results | Comments
Leading clean power company by 2025 | By the end of 2025, convert coal facilities to gas through boiler conversions and combined-cycle repowering | On track | Our Sundance 6 coal facility began conversion to gas in 2020 and was completed in early 2021.
No further coal generation by the end of 2025 and 100 per cent of our owned net generation capacity will be from clean electricity (renewables and gas) | On track | In 2020, we retired our Sundance 3 and Centralia 1 coal facilities, converted our Sundance 6 coal facility to gas and announced the acceleration of our Highvale mine closure to the end of 2021.
Develop new renewable projects that support customer sustainability goals to achieve both long-term power price affordability and carbon reductions | Achieved | In 2020, the Corporation purchased a 49 per cent interest in the 137 MW Skookumchuck wind project and continued development of our 207 MW Windrise wind project. Our 10 MW WindCharger battery storage project also began commercial operations.

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Management’s Discussion and Analysis
2021+ Sustainability Targets
Our 2021 and longer-term sustainability targets support the long-term success of our business. The following targets highlight our future ESG value proposition and paint a portrait of how the Corporation will continue to be positioned as an ESG leader in the future. Goals and targets are established to manage key and emerging material sustainability issues and to improve our performance in these areas. We continue to evolve and adapt our goals and targets to focus on anticipated key areas of sustainability materiality.
We establish our goals and targets with reference to the UN's SDGs and the Future-Fit Business Benchmark. This focus ensures our goals and targets are meaningful in the broader context of solving societal problems; support the ambition of achieving a more sustainable, safe and just planet in the future; and ensure TransAlta's competitiveness both today and in the future.
Targets are outlined below:

ESG Alignment: Environment
TransAlta Sustainability Goal | TransAlta Sustainability Target | Alignment with UN's SDG Target or Future-Fit Business Benchmark
Reclaim land utilized for mining | By 2040, complete full reclamation of our Centralia coal mine in Washington State | Future-Fit Business Benchmark - "Positive Pursuits 13: Ecosystems are restored"
By 2046, complete full reclamation of our Highvale coal mine in Alberta | Future-Fit Business Benchmark - "Positive Pursuits 13: Ecosystems are restored"
Responsible water management | By 2026, reduce fleet-wide water consumption (withdrawals minus discharge) by 20 million m 3 or 40 per cent over the 2015 baseline | UN's SDG Target 6.4: "By 2030, substantially increase water-use efficiency across all sectors and ensure sustainable withdrawals and supply of freshwater to address water scarcity and substantially reduce the number of people suffering from water scarcity."
Reduce operational waste | By 2022, reduce total waste generation by 80 per cent over a 2019 baseline | UN's SDG Target 12.5: "By 2030, substantially reduce waste generation through prevention, reduction, recycling and reuse."
Reduce air emissions | By 2026, achieve a 95 per cent reduction of SO 2 emissions and an 80 per cent reduction of NO x emissions below 2005 levels | UN's SDG Target 9.4: "By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes"
Reduce GHG emissions | By 2030, achieve company-wide GHG reductions of 60 per cent below 2015 levels, in line with a commitment to the UN's SDGs and prevention of 2ºC of global warming | UN's SDG Target 13.2: "Integrate climate change measures into national policies, strategies and planning."
By 2050, achieve carbon neutrality
ESG Alignment: Social
TransAlta Sustainability Goal | TransAlta Sustainability Target | Alignment with UN's SDG Target or Future-Fit Target
Reduce safety incidents | Achieve a Total Recordable Injury Frequency rate below 0.61 | UN's SDG Target 8.8: "Protect labour rights and promote safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment."

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Management’s Discussion and Analysis

Support prosperous Indigenous communities | Support equal access to all levels of education for youth and Indigenous peoples through financial support and employment opportunities | UN's SDG Target 4.5: "By 2030, eliminate gender disparities in education and ensure equal access to all levels of education and vocational training for the vulnerable, including persons with disabilities, Indigenous peoples and children in vulnerable situations."
Provide Indigenous cultural awareness training to all TransAlta employees by the end of 2023 | UN's SDG Target 12.8: "By 2030, ensure that people everywhere have the relevant information and awareness for sustainable development and lifestyles in harmony with nature."
ESG Alignment: Governance
TransAlta Sustainability Goal | TransAlta Sustainability Target | Alignment with UN's SDG Target or Future-Fit Target
Strengthen gender equality | Achieve a quota of 50 per cent female representation on the Board by 2030 | UN's SDG Target 5.5: "Ensure women’s full and effective participation and equal opportunities for leadership at all levels of decision making in political, economic and public life."
Achieve at least 40 per cent female employment among all employees of the Corporation by 2030
Maintain equal pay for women in equivalent roles as men
Demonstrate leadership on ESG reporting within financial disclosures | Maintain our position as a leader on integrated ESG disclosure through increased annual alignment with leading sustainability disclosure frameworks | UN's SDG Target 12.6: "Encourage companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle."
ESG Alignment: Environment and Social
TransAlta Sustainability Goal | TransAlta Sustainability Target | Alignment with UN's SDG Target or Future-Fit Target
Coal transition | No further coal generation by the end of 2025 and 100 per cent of our owned net generation capacity will be from clean electricity (renewables and gas) | UN's SDG Target 7.1: "By 2030, ensure universal access to affordable, reliable and modern energy services."
Discontinue coal power generation in Canada by the end of 2021 | UN's SDG Target 7.1: "By 2030, ensure universal access to affordable, reliable and modern energy services."
Clean energy solutions for customers | Develop new renewable projects that support customer sustainability goals to achieve both long-term power price affordability and carbon reductions | UN's SDG Target 7.2: "By 2030, increase substantially the share of renewable energy in the global energy mix."

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Management’s Discussion and Analysis
Governance and Risk Management
Our business activities expose us to a variety of risks and opportunities including, but not limited to, regulatory changes, rapidly changing market dynamics and increased volatility in our key commodity markets. Our goal is to manage these risks and opportunities so that we are in a position to develop our business and achieve our goals while remaining reasonably protected from an unacceptable level of risk or financial exposure. We use a multilevel risk management oversight structure to manage the risks and opportunities arising from our business activities, the markets in which we operate and the political environments and structures with which we interface.
Governance
The key elements of our governance practices are:
▪Employees, management and the Board are committed to ethical business conduct, integrity and honesty;
▪We have established key policies and standards to provide a framework for how we conduct our business;
▪The Chair of our Board and all directors, other than our President and CEO, are independent within the meaning of National Instrument 58-101 - D isclosure of Corporate Governance Practices;
▪The Board is comprised of individuals with a mix of skills, knowledge and experience that are critical for our business and our strategy;
▪The effectiveness of the Board is achieved through robust annual evaluations and continuing education of our directors; and
▪Our management and Board facilitate and foster an open dialogue with shareholders and community stakeholders.
Commitment to ethical conduct is the foundation of our corporate governance model. We have adopted the following codes of conduct to guide our business decisions and everyday business activities:
▪Corporate Code of Conduct, which applies to all employees and officers of TransAlta and its subsidiaries;
▪Directors’ Code of Conduct;
▪Supplier's Code of Conduct;
▪Finance Code of Ethics, which applies to all financial employees of the Corporation; and
▪Energy Trading Code of Conduct, which applies to all of our employees engaged in energy marketing.
Our codes of conduct outline the standards and expectations we have for our employees, officers, directors, consultants and suppliers with respect to, among other things, the protection and proper use of our assets. The codes also provide guidelines with respect to securing our assets, avoiding conflicts of interest, respect in the workplace, social responsibility, privacy, compliance with laws, insider trading, environment, health and safety, and our commitment to ethical and honest conduct. Our Corporate Code of Conduct and Directors' Code of Conduct each goes beyond the laws, rules and regulations that govern our business in the jurisdictions in which we operate; they outline the principal business practices with which all employees and directors must comply.
Our employees, officers and directors are reminded annually about the importance of ethics and professionalism in their daily work, and must certify annually that they have reviewed and understand their responsibilities as set forth in the respective codes of conduct. This certification also requires our employees, officers and directors to acknowledge that they have complied with the standards set out in the respective code during the last calendar year.
The Board provides stewardship of the Corporation and ensures that the Corporation establishes key policies and procedures for the identification, assessment and management of principal risks and strategic plans. The Board monitors and assesses the performance and progress of the Corporation’s goals through candid and timely reports from the CEO and the senior management team. We have also established an annual evaluation process whereby our directors are provided with an opportunity to evaluate the Board, Board committees, individual directors and the Chair of the Board’s performance.
In order to allow the Board to establish and manage the financial, environmental, and social elements of our governance practices, the Board has established the AFRC, GSSC, the Human Resources Committee (the “HRC”) and the Investment Performance Committee ("IPC").
The AFRC, consisting of independent members of the Board, provides assistance to the Board in fulfilling its oversight responsibility relating to the integrity of our consolidated financial statements and the financial reporting process; the systems of internal accounting and financial controls; the internal audit function; the external auditors’ qualifications and terms and conditions of appointment, including remuneration, independence, performance and reports; and the legal and risk compliance programs as established by management and the Board. The AFRC approves our Commodity and Financial Exposure Management policies and reviews quarterly Enterprise Risk Management reporting.
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The GSSC is responsible for developing and recommending to the Board a set of corporate governance principles applicable to the Corporation and for monitoring compliance with these principles. The GSSC is also responsible for Board recruitment, succession planning and for the nomination of directors to the Board and its committees. In addition, the GSSC assists the Board in fulfilling its oversight responsibilities with respect to the Corporation’s monitoring of environmental, health and safety regulations and public policy changes and the establishment and adherence to environmental, health and safety practices, procedures and policies. The GSSC also receives an annual report on the annual codes of conduct certification process.
In regards to overseeing and seeking to ensure that the Corporation consistently achieves strong environment, health and safety (“EH&S”) performance, the GSSC undertakes a number of actions that include: a) receiving regular reports from management regarding environmental compliance, trends and TransAlta’s responses; b) receiving reports and briefings on management’s initiatives with respect to changes in climate change legislation, policy developments as well as other draft initiatives and the potential impact such initiatives may have on our operations; c) assessing the impact of the GHG policies implementation and other legislative initiatives on the Corporation’s business; d) reviewing with management the EH&S policies of the Corporation; e) reviewing with management the health and safety practices implemented within the Corporation, as well as the evaluation and training processes put in place to address problem areas; f) discussing with management ways to improve the EH&S processes and practices; and g) reviewing the effectiveness of our response to EH&S issues and any new initiatives put in place to further improve the Corporation’s EH&S culture.
The HRC is empowered by the Board to review and approve key compensation and human resources policies of the Corporation that are intended to attract, recruit, retain and motivate employees of the Corporation. The HRC also makes recommendations to the Board regarding the compensation of the CEO, including the review and adoption of equity-based incentive compensation plans, the adoption of human resources policies that support human rights and ethical conduct, and the review and approval of executive management succession and development plans.
The IPC is empowered by the Board to oversee management's investment conclusions and the execution of major, Board-approved capital expenditure projects that further the Corporation's strategic plans. The IPC undertakes a number of actions that include: a) reviewing and considering the substantive risks, returns, financing and other key elements relating to the Corporation's major capital projects; b) reviewing and assessing mitigation plans, expected outcomes, and implementation throughout the project life cycle with respect to substantive risks; c) reviewing and assessing cost-estimating methodologies employed throughout the project life cycle; d) reviewing and assessing progress reports including periodic updates on the project schedule, risks and costs at key milestones as projects advance through to execution; e) reviewing post-project look-backs; and f) reviewing and providing recommendations to the Board regarding capital expenditures associated with such capital projects.
The responsibilities of other stakeholders within our risk management oversight structure are described below:
The CEO and executive management review and report on key risks quarterly. Specific Trading Risk Management reviews are held monthly by the Commodity Risk and Compliance Committee, and weekly by the commodity risk team, the commercial managers in Trading and Marketing, and the Executive Vice-President, Finance & Trading and Chief Financial Officer.
The Investment Committee is chaired by our CEO and is comprised of the CEO, Executive Vice-President, Finance & Trading and Chief Financial Officer, Chief Operating Officer, Chief Development Officer, and Executive Vice-President, Legal, Commercial and External Affairs. It reviews and approves all major capital expenditures including growth, productivity, life extensions and major coal outages. Projects that are approved by the Investment Committee will then be put forward for approval by the Board, if required.
The Commodity Risk & Compliance Committee is chaired by our Executive Vice-President, Finance & Trading and Chief Financial Officer and is comprised of at least three members of senior management. It oversees the risk and compliance program in trading and ensures that this program is adequately resourced to monitor trading operations from a risk and compliance perspective. It also ensures the existence of appropriate controls, processes, systems and procedures to monitor adherence to policy.
The Hydro Operating Committee consists of two members who are Brookfield employees with expertise in hydro facility management, and two TransAlta members. This committee was formed in 2019 for the purpose of collaborating on matters in connection with the operation, and maximization of the value, of TransAlta's Alberta Hydro Assets. It is delivering on its objectives by thoroughly reviewing the operating, maintenance, safety and environmental aspects of TransAlta's Alberta Hydro Assets and, following that review, providing expert advice and recommendations to
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TransAlta’s hydro operational team. The Committee has an initial term of six years, which can be extended for an additional two years.
TransAlta is listed on the TSX and the New York Stock Exchange and is subject to the governance regulations, rules and standards applicable under both exchanges. Our corporate governance practices meet the following governance rules of the TSX and Canadian Securities Administrators: a) Multilateral Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings; b) National Instrument 52-110 - Audit Committees; c) National Policy 58-201 - Corporate Governance Guidelines; and d) National Instrument 58-101 - Disclosure of Corporate Governance Practices. As a “foreign private issuer” under US securities laws, we are generally permitted to comply with Canadian corporate governance requirements. Additional information regarding our governance practices can be found in our most recent management information circular.
COVID-19
We have adopted a number of risk mitigation measures in response to the COVID-19 pandemic, including the formal implementation of TransAlta's business continuity plan on March 9, 2020. The Board and management have been monitoring the development of the outbreak and are continually assessing its impact on the Corporation's operations, supply chains and customers, as well as, more generally, to the business and affairs of the Corporation. Potential impacts of the pandemic on the business and affairs of the Corporation include, but are not limited to: potential interruptions of production, supply chain disruptions, unavailability of employees at TransAlta, potential delays in growth projects, increased credit risk with counterparties and increased volatility in commodity prices and the valuations of financial instruments. In addition, the broader impacts to the global economy and financial markets could have potential adverse impacts on the availability of capital for investment and the demand for power and commodity pricing.
To manage the risks resulting from COVID-19, we have taken a number of steps in furtherance of the Corporation's business continuity efforts:
Management Responses
▪Formed a COVID-19 emergency team run by our Chief Operating Officer, reporting to the CEO;
▪Regularly communicated with the Board and employees in regard to the Corporation's response to COVID-19;
▪Created a team to develop, implement and update COVID-19 safety protocols, including a back-to-office and site strategy that will remain in place until a vaccine has been distributed;
▪Established a committee to consider and respond to any claims of force majeure that may be received as a result of COVID-19; and
▪Developed leadership plans, including contingent authorities.
Policy Changes
▪Aligned all non-essential travel and quarantine requirements with local jurisdictional guidance for all TransAlta employees and contractors returning from air, bus, train or ship travel for all jurisdictions in which we operate.
Employee Changes
▪Provided assurances to employees that their employment with TransAlta would not be impacted by the COVID-19 pandemic;
▪Developed and implemented COVID-19-specific back-to-office protocols to ensure all TransAlta locations remain safe;
▪Requested and received an essential workers quarantine exemption approval from Alberta Health to minimize disruptions in the event international technical assistance is required for our Alberta assets;
▪Implemented health screening procedures, including questionnaires and temperature tests, enhanced cleaning measures and strict work protocols at the Corporation’s offices and facilities in accordance with our back-to-office and site strategy;
▪Implemented training and policies to seamlessly allow non-essential employees to work remotely, as appropriate; and
▪Provided COVID-19 related town halls and information sessions for employees featuring medical and infectious disease experts.
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Operational Changes
▪Modified our operating procedures and implemented restrictions to non-essential access to our facilities to support continued operations through the pandemic;
▪Reviewed the supply chain risk associated with all key power-generation process inputs and implemented weekly monitoring for changes in risk;
▪Reached out to key supply chain contacts to determine strategies and contingencies to ensure we are able to continue to progress our growth projects, wherever possible; and
▪Identified new cybersecurity risks associated with phishing emails and enhanced security protocols and increased awareness of potential threats.
Financial Oversight
▪Continued to maintain a comprehensive commodity hedging program for our merchant assets that can respond to changes in underlying market conditions;
▪Continued to monitor counterparties for changes in creditworthiness, as well as monitor their ability to meet obligations; and
▪Continued to monitor the situation and communicate with our key lenders on any foreseeable impacts and on our response to the crisis. We maintain a strong financial position and significant liquidity with our existing committed credit facilities.
Overall, we continue to actively monitor the situation and advice from public health officials with a view to responding to changing recommendations and adapting our response and approach as necessary.
Risk Controls
Our risk controls have several key components:
Enterprise Tone
We strive to foster beliefs and actions that are true to, and respectful of, our many stakeholders. We do this by investing in communities where we live and work, operating and growing sustainably, putting safety first and being responsible to the many groups and individuals with whom we work.
Policies
We maintain a comprehensive set of enterprise-wide policies. These policies establish delegated authorities and limits for business transactions, as well as allow for an exception approval process. Periodic reviews and audits are performed to ensure compliance with these policies. All employees and directors are required to sign a code of conduct on an annual basis.
Reporting
On a regular basis, residual risk exposures are reported to key decision-makers including the Board, the AFRC, senior management and/or the Commodity Risk & Compliance Committee, as applicable. Reporting to this latter committee includes analysis of new risks, monitoring of status to risk limits, review of events that can affect these risks and discussion and review of the status of actions to minimize risks. This monthly reporting provides for effective and timely risk management and oversight.
Whistleblower System
We have a process in place where employees, contractors, shareholders or other stakeholders may confidentially or anonymously report any potential legal or ethical concerns, including concerns relating to accounting, internal control accounting, auditing or financial matters or relating to alleged violations of any laws or our code of conduct. These concerns can be submitted confidentially and anonymously, either directly to the AFRC or through TransAlta’s toll-free telephone or online Ethics Helpline. The AFRC Chair is immediately notified of any material complaints and, otherwise, the AFRC receives a report at every quarterly committee meeting on all findings related to any material complaints or complaints relating to accounting or financial reporting or alleged breaches in internal controls over financial reporting.
Value at Risk and Trading Positions
Value at risk (“VaR”) is one of the primary measures used to manage our exposure to market risk resulting from commodity risk management activities. VaR is calculated and reported on a daily basis. This metric describes the potential change in the value of our trading portfolio over a three-day period within a 95 per cent confidence level, resulting from normal market fluctuations.
VaR is a commonly used metric that is employed by industry to track the risk in commodity risk management positions and portfolios. Two common methodologies for estimating VaR are the historical variance/covariance and Monte Carlo
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Management’s Discussion and Analysis
approaches. We estimate VaR using the historical variance/covariance approach. An inherent limitation of historical variance/covariance VaR is that historical information used in the estimate may not be indicative of future market risk. Stress tests are performed periodically to measure the financial impact to the trading portfolio resulting from potential market events, including fluctuations in market prices, volatilities of those prices and the relationships between those prices. We also employ additional risk mitigation measures. VaR at Dec. 31, 2020, associated with our proprietary commodity risk management activities was $1 million (2019 - $1 million). Please refer to the Risk Factors – Commodity Price Risk section of this MD&A below for further discussion.
Risk Factors
Risk is an inherent factor of doing business. The following section addresses some, but not all, risk factors that could affect our future plans, performance, results or outcomes and our activities in mitigating those risks. These risks do not occur in isolation, but must be considered in conjunction with each other. For a further discussion of these and other risk factors affecting the Corporation, readers are encouraged to read the Risk Factors section of the AIF, available on our website at www.transalta.com and under our profile on SEDAR at www.sedar.com and on EDGAR at www.edgar.gov.
A reference herein to a material adverse effect on the Corporation means such an effect on the Corporation or its business, operations, financial condition, results of operations and/or its cash flows, as the context requires.
For some risk factors, we show the after-tax effect on net earnings of changes in certain key variables. The analysis is based on business conditions and production volumes in 2020. Each item in the sensitivity analysis assumes all other potential variables are held constant. While these sensitivities are applicable to the period and the magnitude of changes on which they are based, they may not be applicable in other periods, under other economic circumstances or for a greater magnitude of changes. The changes in rates should also not be assumed to be proportionate to earnings in all instances.
Volume Risk
Volume risk relates to the variances from our expected production. The financial performance of our hydro, wind and solar operations is highly dependent upon the availability of their input resources in a given year. Shifts in weather or climate patterns, seasonal precipitation and the timing and rate of melting and runoff may impact the water flow to our facilities. The strength and consistency of the wind resource at our facilities impacts production. The operation of thermal facilities can also be impacted by ambient temperatures and the availability of water and fuel. Where we are unable to produce sufficient quantities of output in relation to contractually specified volumes, we may be required to pay penalties or purchase replacement power in the market.
We manage volume risk by:
▪Actively managing our assets and their condition in order to be proactive in facility maintenance so that our facilities are available to produce when required;
▪Monitoring water resources throughout Alberta to the best of our ability and optimizing this resource against real-time electricity market opportunities;
▪Placing our facilities in locations we believe to have adequate resources to generate electricity to meet the requirements of our contracts. However, we cannot guarantee that these resources will be available when we need them or in the quantities that we require; and
▪Diversifying our fuels and geography to mitigate regional or fuel-specific events.
The sensitivity of volumes to our net earnings is shown below:

Factor | Increase or decrease (%) | Approximate impact on net earnings
Availability/production | 1 |  | $8 million

Generation Equipment and Technology Risk
There is a risk of equipment failure due to wear and tear, latent defect, design error or operator error, among other things, which could have a material adverse effect on the Corporation. Although our generation facilities have generally operated in accordance with expectations, there can be no assurance that they will continue to do so. Our facilities are exposed to operational risks such as failures due to cyclic, thermal and corrosion damage in boilers, generators and turbines, as well as other issues that can lead to outages and increased volume risk. If facilities do not meet availability or production targets specified in their PPA or other long-term contracts, we may be required to compensate the purchaser for the loss in the availability of production or record reduced energy or capacity payments. For merchant facilities, an outage can result in lost merchant opportunities. Therefore, an extended outage could have a material adverse effect on our business, financial condition, results of operations or our cash flows.
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Management’s Discussion and Analysis
As well, we are exposed to procurement risk for specialized parts that may have long lead times. If we are unable to procure these parts when they are needed for maintenance activities, we could face an extended period where our equipment is unavailable to produce electricity.
We manage our generation equipment and technology risk by:
▪Operating our facilities within defined industry standards that optimizes availability over their commercial operating life;
▪Performing preventive maintenance in accordance with applicable industry practices, major equipment supplier recommendations and our operating experience;
▪Adhering to comprehensive maintenance programs and regular turnaround schedules;
▪Adjusting maintenance plans by facility to reflect equipment type, age and commercial risk;
▪Having adequate business interruption insurance in place to cover extended forced outages;
▪Having clauses in our PPAs and other long-term contracts that allow us to declare force majeure in the event of an unforeseen failure;
▪Selecting and applying proven technology in our generating facilities, where practical;
▪Where technology is newer, ensuring service agreements with equipment suppliers include appropriate availability and performance guarantees;
▪Monitoring our fleet against industry performance to identify issues or advancements that may impact performance and adjusting our maintenance and investment programs accordingly;
▪Negotiating strategic supply agreements with selected vendors to ensure key components are readily available in the event of a significant outage;
▪Entering into long-term arrangements with our strategic supply partners to ensure availability of critical spare parts; and
▪Implementing long-term asset management strategies that optimize the life cycles of our existing facilities and/or identify replacement requirements for generating assets.
Commodity Price Risk
We have exposure to movements in certain commodity prices, including the market price of electricity and fuels used to produce electricity in both our electricity generation and proprietary trading businesses.
We manage the financial exposure associated with fluctuations in electricity price risk by:
▪Entering into long-term contracts that specify the price at which electricity, steam and other services are provided;
▪Maintaining a portfolio of short-, medium- and long-term contracts to mitigate our exposure to short-term fluctuations in commodity prices;
▪Purchasing natural gas coincident with production for merchant facilities so spot market spark spreads are adequate to produce and sell electricity at a profit; and
▪Ensuring limits and controls are in place for our proprietary trading activities.
In 2020, we had approximately 90 per cent (2019 – 90 per cent) of production under short-term and long-term contracts and hedges. In the event of a planned or unplanned outage or other similar event, however, we are exposed to changes in electricity prices on purchases of electricity from the market to fulfil our supply obligations under these short- and long-term contracts.
We manage the financial exposure to fluctuations in the cost of fuels used in production by:
▪Entering into long-term contracts that specify the price at which fuel is to be supplied to our facilities;
▪Hedging emissions costs by entering into various emission trading arrangements; and
▪Selectively using hedges, where available, to set prices for fuel.
In 2020, 89 per cent (2019 – 66 per cent) of our gas consumption used in generating electricity was contractually fixed or passed through to our customers and 78 per cent (2019 – 76 per cent) of our purchased coal was contractually fixed.
Actual variations in net earnings can vary from calculated sensitivities and may not be linear due to optimization opportunities, co-dependencies and cost mitigations, production, availability and other factors.
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Management’s Discussion and Analysis
Coal Supply Risk
Having sufficient fuel available when required for generation is essential to maintaining our ability to produce electricity under contracts and for merchant sale opportunities. At our coal-fired facilities, input costs such as diesel, tires, the price and availability of mining equipment, the volume of overburden removed to access coal reserves, rail rates and the location of mining operations relative to the power facilities are some of the exposures in our operations. Additionally, the ability of the mines to deliver coal to the power facilities can be impacted by weather conditions and labour relations. At Centralia, interruptions at our supplier’s mine, the availability of trains to deliver coal and the financial viability of our coal suppliers could affect our ability to generate electricity.
We manage coal supply risk by:
▪Ensuring that the majority of the coal used in electrical generation in Alberta is from reserves permitted through coal rights we have purchased or for which we have long-term supply contracts, thereby limiting our exposure to fluctuations in the supply of coal from third parties;
▪Sourcing the coal used at Centralia from different mine sources to ensure sufficient coal is available at a competitive cost;
▪Contracting sufficient trains to deliver the coal requirements at Centralia;
▪Ensuring coal inventories on hand at Alberta Thermal and Centralia are at appropriate levels for usage requirements;
▪Ensuring efficient coal handling and storage facilities are in place so that the coal being delivered can be processed in a timely and efficient manner;
▪Monitoring and maintaining coal specifications, and carefully matching the specifications mined with the requirements of our facilities;
▪Co-firing natural gas with coal;
▪Monitoring the financial viability of Centralia suppliers; and
▪Hedging diesel exposure in mining and transportation costs.
Natural Gas Supply and Price Risk
Having sufficient natural gas and natural gas transportation services available so that we can blend natural gas in with coal at our Alberta thermal facilities, and for the ultimate conversion of those units to natural gas, is essential to maintaining the reliability and availability of those facilities. Using natural gas at our coal-fired facilities, and ultimately converting these facilities to natural gas, allows us to reduce overall carbon emissions and costs, reduce the risk of coal opacity issues, and improves our operating and sustaining capital costs. Ensuring adequate pipeline transportation service and natural gas supply for our Alberta thermal units may be impacted by, among other things, the timing of receiving regulatory and other approvals for firm transportation commitments, weather-related events, work stoppages, system maintenance, variability in pipeline hydraulics pressure and flows, and impacts due to other naturally created events. Pricing of natural gas is driven by market supply and demand fundamentals for natural gas in North America and globally. We are exposed to changes in natural gas prices, which may impact the profitability of our facilities and how the facilities are dispatched into the market.
We manage gas supply and price risk by:
▪Working to ensure that we have at least two pipelines supplying the gas used in electrical generation in Alberta;
▪Contracting for firm gas delivery and supply;
▪Monitoring the financial viability of gas producers and pipelines;
▪Hedging gas price exposure;
▪Monitoring pipeline maintenance schedules and transportation availability; and
▪Incorporating the ability to continue using coal in some of the units as the units transition from coal to 100 per cent natural gas.
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Environmental Compliance Risk
Environmental compliance risks are risks to our business associated with existing and/or changes in environmental regulations. New emission reduction objectives for the power sector are being established by governments in Canada and the US. We anticipate continued and growing scrutiny by investors and other stakeholders relating to sustainability performance. These changes to regulations may affect our earnings by reducing the operating life of generating facilities and imposing additional costs on the generation of electricity through such measures as emission caps or taxes, requiring additional capital investments in emission capture technology or requiring us to invest in offset credits. It is anticipated that these compliance costs will increase due to increased political and public attention to environmental concerns.
We manage environmental compliance risk by:
▪Seeking continuous improvement in numerous performance metrics such as emissions, safety, land and water impacts, and environmental incidents;
▪
▪Having an International Organization for Standardization and Occupational Health and Safety Assessment Series-based environmental health and safety management system in place that is designed to continuously improve performance;
▪
▪Committing significant experienced resources to work with regulators in Canada and the US to advocate that regulatory changes are well-designed and cost-effective;
▪
▪Developing compliance plans that address how to meet or surpass emission standards for GHGs, mercury, SO 2, and NO x, which will be adjusted as regulations are finalized;
▪
▪Purchasing emission reduction offsets;
▪
▪Investing in renewable energy projects, such as wind, solar and hydro generation; and
▪
▪Incorporating change-in-law provisions in contracts that allow recovery of certain compliance costs from our customers.
We are committed to remaining in compliance with all environmental regulations relating to operations and facilities. Compliance with both regulatory requirements and management system standards is regularly audited through our performance assurance policy and results are reported to the GSSC.
Credit Risk
Credit risk is the risk to our business associated with changes in the creditworthiness of entities with which we have commercial exposures. This risk results from the ability of a counterparty to either fulfil its financial or performance obligations to us or where we have made a payment in advance of the delivery of a product or service. The inability to collect cash due to us or to receive products or services may have an adverse impact upon our net earnings and cash flows.
We manage our exposure to credit risk by:
▪Establishing and adhering to policies that define credit limits based on the creditworthiness of counterparties, contract term limits and the credit concentration with any specific counterparty;
▪
▪Requiring formal sign-off on contracts that include commercial, financial, legal and operational reviews;
▪
▪Requiring security instruments, such as parental guarantees, letters of credit, and cash collateral or third-party credit insurance if a counterparty goes over its limits. Such security instruments can be collected if a counterparty fails to fulfil its obligation; and
▪
▪Reporting our exposure using a variety of methods that allow key decision-makers to assess credit exposure by counterparty. This reporting allows us to assess credit limits for counterparties and the mix of counterparties based on their credit ratings.
If established credit exposure limits are exceeded, we take steps to reduce this exposure, such as by requesting collateral, if applicable, or by halting commercial activities with the affected counterparty. However, there can be no assurances that we will be successful in avoiding losses as a result of a contract counterparty not meeting its obligations.
Amidst the current economic conditions resulting from the COVID-19 pandemic, TransAlta has implemented the following additional measures to monitor its counterparties for changes in their ability to meet obligations:
▪daily monitoring of events impacting counterparty creditworthiness and counterparty credit downgrades;
▪weekly oversight and follow-up, if applicable, of accounts receivables; and
▪review and monitoring of key suppliers, counterparties and customers (i.e., offtakers).
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Management’s Discussion and Analysis
As needed, additional risk mitigation tactics will be taken to reduce the risk to TransAlta. These risk mitigation tactics may include, but are not limited to, immediate follow-up on overdue amounts, adjusting payment terms to ensure a portion of funds are received sooner, requiring additional collateral, reducing transaction terms and working closely with impacted counterparties on negotiated solutions.
Our credit risk management profile and practices have not changed materially from Dec. 31, 2019. We had no material counterparty losses in 2020. We continue to keep a close watch on changes and trends in the market and the impact these changes could have on our energy trading business and hedging activities, and will take appropriate actions as required, although no assurance can be given that we will always be successful.
The following table outlines our maximum exposure to credit risk without taking into account collateral held or right of set-off, including the distribution of credit ratings, as at Dec. 31, 2020:

| Investment grade (%) | Non-investment grade (%) | Total (%) | Total amount
Trade and other receivables(1) | 92 |  | 8 |  | 100 |  | 583 |
Long-term finance lease receivables | 100 |  | — |  | 100 |  | 228 |
Risk management assets(1) | 93 |  | 7 |  | 100 |  | 692 |
Loan receivable(2) | — |  | 100 |  | 100 |  | 52 |
Total |  |  |  | 1,555 |

(1) Letters of credit and cash and cash equivalents are the primary types of collateral held as security related to these amounts.
(2) The counterparties have no external credit ratings.
The maximum credit exposure to any one customer for commodity trading operations, including the fair value of open trading positions net of any collateral held, is $22 million (2019 – $5 million).
Currency Rate Risk
We have exposure to various currencies as a result of our investments and operations in foreign jurisdictions, the earnings from those operations, the acquisition of equipment and services and foreign-denominated commodities from foreign suppliers, and our US-denominated debt. Our exposures are primarily to the US and Australian currencies. Changes in the values of these currencies in relation to the Canadian dollar may affect our earnings or the value of our foreign investments to the extent that these positions or cash flows are not hedged or the hedges are ineffective.
We manage our currency rate risk by establishing and adhering to policies that include:
▪Hedging our net investments in US operations using US-denominated debt;
▪
▪Entering into forward foreign exchange contracts to hedge future foreign-denominated expenditures including our US-denominated debt that is outside the net investment portfolio; and
▪
▪Hedging our expected foreign operating cash flows. Our target is to hedge a minimum of 60 per cent of our forecasted foreign operating cash flows over a four-year period, with a minimum of 90 per cent in the current year, 70 per cent in the next year, 50 per cent in the third year and 30 per cent in the fourth year. The US exposure will be managed with a combination of interest expense on our US-denominated debt and forward foreign exchange contracts and the Australian exposure will be managed with a combination of interest expense on our Australian-dollar denominated debt and forward foreign exchange contracts.
The sensitivity of our net earnings to changes in foreign exchange rates has been prepared using management’s assessment that an average $0.03 increase or decrease in the US or Australian currencies relative to the Canadian dollar is a reasonable potential change over the next quarter, and is shown below:

Factor | Increase or decrease | Approximate impact on net earnings
Exchange rate | $0.03 | $12 million

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Liquidity Risk
Liquidity risk relates to our ability to access capital to be used to engage in trading and hedging activities, capital projects, debt refinancing and payment of liabilities, capital structure and general corporate purposes. Credit ratings facilitate these activities and changes in credit ratings may affect our ability and/or the cost of accessing capital markets, establishing normal course derivative or hedging transactions, including those undertaken by our Energy Marketing segment. Counterparties enter into certain electricity and natural gas purchase and sale contracts for the purposes of asset-backed sales and proprietary trading. The terms and conditions of these contracts require the counterparties to provide collateral when the fair value of the obligation pursuant to these contracts is in excess of any credit limits granted. Downgrades in creditworthiness by certain credit rating agencies may impact our ability to enter into these contracts or any ordinary course contract, decrease the credit limits granted and increase the amount of collateral that may have to be provided. Certain existing contracts contain credit rating contingent clauses, that, when triggered, automatically increase costs under the contract or require additional collateral to be posted. Where the contingency is based on the lowest single rating, a one-level downgrade from a credit rating agency with an originally higher rating may not, however, trigger additional direct adverse impact.
We continue to focus on maintaining our financial position and flexibility. Credit ratings issued for TransAlta, as well as the corresponding rating agency outlooks, are set out in the Financial Capital section of this MD&A. Credit ratings are subject to revision or withdrawal at any time by the rating organization, and there can be no assurance that TransAlta’s credit ratings and the corresponding outlook will not be changed, resulting in the adverse possible impacts identified above.
As at Dec. 31, 2020, we have liquidity of $2.1 billion comprised of amounts not drawn under our committed credit facilities and cash on hand that is available to draw on for projects in 2021.
We manage liquidity risk by:
▪Monitoring liquidity on trading positions;
▪Preparing and revising longer-term financing plans to reflect changes in business plans and the market availability of capital;
▪Reporting liquidity risk exposure for commodity risk management activities on a regular basis to the Commodity Risk & Compliance Committee, senior management and the AFRC;
▪Maintaining a strong balance sheet; and
▪Maintaining sufficient undrawn committed credit lines to support potential liquidity requirements.
Interest Rate Risk
Changes in interest rates can impact our borrowing costs. Changes in our cost of capital may also affect the feasibility of new growth initiatives.
We manage interest rate risk by establishing and adhering to policies that include:
▪Employing a combination of fixed and floating rate debt instruments; and
▪Monitoring the mixture of floating and fixed rate debt and adjusting to ensure efficiency.
At Dec. 31, 2020, approximately seven per cent (2019 – 11 per cent) of our total debt portfolio was subject to changes in floating interest rates through a combination of floating rate debt and interest rate swaps.
The sensitivity of changes in interest rates upon our net earnings is shown below:

Factor | Increase or decrease (%) | Approximate impact on net earnings
Interest rate | 30 | $1 million before tax

IBOR reform could impact interest rate risk with respect to the Corporation's credit facilities and the Poplar Creek non-recourse bond held by a TransAlta subsidiary. The facility references LIBOR for US-dollar drawings and the Canadian Dollar Offer Rate ("CDOR") for Canadian-dollar drawings; in addition, the non-recourse bond references the three-month CDOR. To date, no US-dollar drawings have been made on the facility and there is currently a plan to discontinue the six- and 12-month CDOR, which does not impact the facility or the non-recourse bond.
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Management’s Discussion and Analysis
Outstanding forward starting interest rate swaps in both Canadian and US dollars should not be affected as they are set to settle in 2021 prior to any IBOR changes being made. The Corporation is monitoring the reform and does not expect any material impacts.
Project Management Risk
On capital projects, we face risks associated with cost overruns, delays and performance.
We manage project risks by:
▪Ensuring all projects follow established corporate processes and policies;
▪Identifying key risks during every stage of project development and ensuring mitigation plans are factored into capital estimates and contingencies;
▪Reviewing project plans, key assumptions and returns with senior management prior to Board of Director approvals;
▪Consistently applying project management methodologies and processes;
▪Determining contracting strategies that are consistent with the project scope and scale to ensure key risks, such as labour and technology, are managed by contractors and equipment suppliers;
▪Ensuring contracts for construction and major equipment include key terms for performance, delays and quality backed by appropriate levels of liquidated damages;
▪Reviewing projects after achieving commercial operation to ensure learnings are incorporated into the next project;
▪Negotiating contracts for construction and major equipment to lock-in key terms such as price, availability of long lead equipment, foreign currency rates and warranties as much as is economically feasible before proceeding with the project; and
▪Entering into labour agreements to provide security around labour cost, supply and productivity.
Human Resource Risk
Human resource risk relates to the potential impact upon our business as a result of changes in the workplace. Human resource risk can occur in several ways:
▪Potential disruption as a result of labour action at our generating facilities;
▪Reduced productivity due to turnover in positions;
▪Inability to complete critical work due to vacant positions;
▪Failure to maintain fair compensation with respect to market rate changes; and
▪Reduced competencies due to insufficient training, failure to transfer knowledge from existing employees or insufficient expertise within current employees.
We manage this risk by:
▪Monitoring industry compensation and aligning salaries with those benchmarks;
▪Using incentive pay to align employee goals with corporate goals;
▪Monitoring and managing target levels of employee turnover; and
▪Ensuring new employees have the appropriate training and qualifications to perform their jobs.
In 2020, 46 per cent (2019 – 46 per cent) of our labour force was covered by 10 (2019 – 10) collective bargaining agreements. In 2020, two (2019 – four) agreements were renegotiated. We anticipate the successful negotiation of three collective agreements in 2021.
Regulatory and Political Risk
Regulatory and political risk is the risk to our business associated with potential changes to the existing regulatory structures and the political influence upon those structures within each of the jurisdictions in which we operate. This risk can come from market regulation and re-regulation, increased oversight and control, structural or design changes in markets, or other unforeseen influences. Market rules are often dynamic and we are not able to predict whether there will be any material changes in the regulatory environment or the ultimate effect of changes in the regulatory environment on our business. This risk includes, among other things, uncertainties associated with the development of carbon pricing policies and funding.
We manage these risks systematically through our Legal and Regulatory groups and our Compliance program, which is reviewed periodically to ensure its effectiveness. We also work with governments, regulators, electricity system operators and other stakeholders to resolve issues as they arise. We are actively monitoring changes to market rules and market design, and we engage in industry- and government-agency-led stakeholder engagement processes.
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Management’s Discussion and Analysis
Through these and other avenues, we engage in advocacy and policy discussions at a variety of levels. These stakeholder consultations have allowed us to engage in proactive discussions with governments and regulatory agencies over the longer term.
International investments are subject to unique risks and uncertainties relating to the political, social and economic structures of the respective country and such country’s regulatory regime. We mitigate this risk through the use of non-recourse financing and insurance.
Transmission Risk
Access to transmission lines and transmission capacity for existing and new generation is key to our ability to deliver energy produced at our power facilities to our customers. The risks associated with the aging existing transmission infrastructure in markets in which we operate continue to increase because new connections to the power system are consuming transmission capacity faster than it is being added by new transmission developments.
Reputation Risk
Our reputation is one of our most valued assets. Reputation risk relates to the risk associated with our business because of changes in opinion from the general public, private stakeholders, governments and other entities.
We manage reputation risk by:
▪Striving as a neighbour and business partner in the regions where we operate to build viable relationships based on mutual understanding leading to workable solutions with our neighbours and other community stakeholders;
▪Clearly communicating our business objectives and priorities to a variety of stakeholders on a routine and transparent basis;
▪Applying innovative technologies to improve our operations, work environment and environmental footprint;
▪Maintaining positive relationships with various levels of government;
▪Pursuing sustainable development as a longer-term corporate strategy;
▪Ensuring that each business decision is made with integrity and in line with our corporate values;
▪Communicating the impact and rationale of business decisions to stakeholders in a timely manner; and
▪Maintaining strong corporate values that support reputation risk management initiatives, including the annual Code of Conduct sign-off.
Corporate Structure Risk
We conduct a significant amount of business through subsidiaries and partnerships. Our ability to meet and service debt obligations is dependent upon the results of operations of our subsidiaries and partnerships and the payment of funds by our subsidiaries and partnerships in the form of distributions, loans, dividends or otherwise. In addition, our subsidiaries and partnerships may be subject to statutory or contractual restrictions that limit their ability to distribute cash to us.
Cybersecurity Risk
We rely on our information technology to process, transmit and store electronic information and data used for the safe operation of our assets. In today's ever-evolving cybersecurity landscape, any attacks or other breaches of network or information systems may cause disruptions to our business operations. Cyberattackers may use a range of techniques, from exploiting vulnerabilities within our user-base, to using sophisticated malicious code on a single or distributed basis to try to breach our network security controls. Attackers may also use a combination of techniques in their attempt to evade safeguards that we have in place such as firewalls, intrusion prevention systems and antivirus software that exist on our network infrastructure systems. A successful cyberattack may allow for the unauthorized interception, destruction, use or dissemination of our information and may cause disruptions to our business operations.
We continuously take measures to secure our infrastructure against potential cyberattacks that may damage our infrastructure, systems and data. TransAlta’s cybersecurity model consists of three pillars: technology, processes and people. Each of these pillars can be reinforced independently to address specific cyber risks and threats that are confronting TransAlta. Significant cyber risks that could pose a threat to TransAlta include phishing, ransomware, social engineering, supplier chain, commodity hostage, state sponsored, artificial intelligence, machine learning attacks and a high risk of cybersecurity employee turnover. Proactive controls and safeguards to mitigate cybersecurity risk and threats posed to the organization include:
▪Leveraging in place technologies to restrict communication within TransAlta’s networks thus limiting the ability for adversaries to achieve their aim;
▪Partnering with a third-party cybersecurity specialty firm to outsource critical components of our cybersecurity program;
▪Enhancing our policies and processes through the use of periodic reviews and table-top exercises;
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Management’s Discussion and Analysis
▪Maintaining an effective and robust cybersecurity awareness training and campaign;
▪Integrating cybersecurity into our business processes and performing robust cybersecurity risk assessments; and
▪Continuously improving our cybersecurity program to ensure it is effective in responding to and addressing cybersecurity risks.
While we have cyber insurance (as well as systems, policies, hardware, practices, data backups and procedures designed to prevent or limit the effect of the security breaches of our generation facilities and infrastructure and data), there can be no assurance that these measures will be sufficient or that such security breaches will not occur or, if they do occur, that they will be adequately addressed in a timely manner. We closely monitor both preventive and detective measures to manage these risks.
General Economic Conditions
Changes in general economic conditions impact product demand, revenue, operating costs, the timing and extent of capital expenditures, the net recoverable value of PP&E, financing costs, credit and liquidity risk, and counterparty risk.
Income Taxes
Our operations are complex and located in several countries. The computation of the provision for income taxes involves tax interpretations, regulations and legislation that are continually changing. Our tax filings are subject to audit by taxation authorities. Management believes that it has adequately provided for income taxes as required by IFRS, based on all information currently available.
The Corporation is subject to changing laws, treaties and regulations in and between countries. Various tax proposals in the countries we operate in could result in changes to the basis on which deferred taxes are calculated or could result in changes to income or non-income tax expense. There has recently been an increased focus on issues related to the taxation of multinational corporations. A change in tax laws, treaties or regulations, or in the interpretation thereof, could result in a materially higher income or non-income tax expense that could have a material adverse impact on the Corporation.
The sensitivity of changes in income tax rates upon our net earnings is shown below:

Factor | Increase or decrease (%) | Approximate impact on net earnings
Tax rate | 1 |  | $3 million

Legal Contingencies
We are occasionally named as a party in various disputes, claims and legal or regulatory proceedings that arise during the normal course of our business. We review each of these claims, including the nature and merits of the claim, the amount in dispute or claimed, and the availability of insurance coverage. There can be no assurance that any particular dispute, claim or proceeding will be resolved in our favour or our liabilities with respect to such claims will not have a material adverse effect on us or our business, operations or financial results. Please refer to the Other Consolidated Analysis section of this MD&A for further details.
Other Contingencies
We maintain a level of insurance coverage deemed appropriate by management. There were no significant changes to our insurance coverage during renewal of the insurance policies on Dec. 31, 2020. Our insurance coverage may not be available in the future on commercially reasonable terms. There can be no assurance that our insurance coverage will be fully adequate to compensate for potential losses incurred. In the event of a significant economic event, the insurers may not be capable of fully paying all claims. All insurance policies are subject to standard exclusions. Cyber coverage is not currently purchased.
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Management’s Discussion and Analysis
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining adequate internal control over financial reporting (‘‘ICFR’’) and disclosure controls and procedures (“DC&P’’). For the year ended Dec. 31, 2020, the majority of our workforce supporting and executing our ICFR and DC&P worked remotely. There has been minimal impact to the design and performance of our internal controls. Management has reviewed the changes as a result of changes implemented in response to COVID-19 and is reasonably assured that adjustments to process have not materially affected, or are reasonably likely to materially affect, our ICFR or DC&P
ICFR is a framework designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS. Management has used the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in order to assess the effectiveness of the Corporation’s ICFR.
DC&P refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under securities legislation is recorded, processed, summarized and reported within the time frame specified in applicable securities legislation. DC&P include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under applicable securities legislation is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosure.
Together, the ICFR and DC&P frameworks provide internal control over financial reporting and disclosure. In designing and evaluating our ICFR and DC&P, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and as such may not prevent or detect all misstatements, and management is required to apply its judgment in evaluating and implementing possible controls and procedures. Further, the effectiveness of ICFR is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may change.
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our ICFR and DC&P as of the end of the period covered by this MD&A. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as at Dec. 31, 2020, the end of the period covered by this MD&A, our ICFR and DC&P were effective.
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